30 June 2003 14:26 [Source: ICIS news]
Companies looking at the prospects and performance of businesses in different chemical industry sectors have for a long time had to make guesses with little real guide about how the different sectors compare.
Now a study of divisional results by business advisers KPMG makes a first attempt at comparing the performance and operational metrics of businesses grouped by sector*. The analysis is far from complete since many companies do not report by product sector, and even when grouping like for like divisions, in reality there are often significant differences in the subsector activities. Nevertheless, it is the beginning of fact-based comparisons, and gives some real indications of which sectors are shining, and which companies appear best in class for their product group.
This first study has drawn together divisional data disclosed in 2001 Annual Reports. The data allows divisional businesses to be looked at in operating performance terms, although since annual reports do not link divisional data directly to overall corporate financial activity, they are not necessarily indicative of overriding corporate financial performance.
The analysis shows both clear trends and some surprises. Not unexpectedly, life sciences and specialties businesses generally produce higher operating returns than petrochemicals. Noteworthy, however, is that the range of performances within a product area can be extremely broad, with individual companies way outside sector averages through their own superior or underperformance. The table shows some of the top performers taken from the list of those who report.
The sectors which shine in terms of margins, (operating profits/sales), are - unsurprisingly - those which are most linked to the life sciences. The fine chemicals sector, with 10 entrants in the list, has several high margin businesses, but figures range from the top two of Johnson Matthey’s fine chemicals business with 29.2% margin and Lonza at 22.9% to others at 4.6% and below zero. There may be accounting issues behind some of the numbers, and no doubt there are stories behind the figures, but the listing does give some ability to benchmark.
Following the life sciences and associated fine chemicals areas, the next best sector performers in the ranking by margin are the speciality polymer and the fragrance, food and flavouring sectors. Speciality polymers are somewhat spread through the list, but headed by Degussa (21.0%), Celanese (17.0%) and Crompton (15.6%). Flavours, foods and fragrances form a much narrower and smaller band, although clearly in the top half of the listing, and are headed by Degussa’s health and nutrition business (16.2%).
Looking at the bottom one-third of the list ranking product divisions by margin, unsurprisingly petrochemicals activities generally were in this area, with the margins of the majority in the range from around minus 10% up to around the +8 % level. For many petrochemical producers, 2001 was a difficult year. Nevertheless, there are quite a number of petrochemicals businesses with high margin performances.
The top performer by a clear leap was Sabic, with a margin of 21.3%. It was followed by the polymer processing activities of Tessenderlo (14.6%), the films business of UCB (12.4%) and the acetates business of Celanese (11.9%). The petrochemicals business of Reliance, with an operating margin of 11.2% followed next, demonstrating perhaps, that just like the Sabic case, you need some real differentiator for your business to be one with high margins.
For other product sectors, it is in general surprising at the extent to which the margin performances are spread throughout the ranked list. There are some exceptional businesses – and perhaps Octel’s lead alkyls business (23.0% margin) and Tessenderlo’s natural organics business (23.4%), which focuses on gelatin, come in that category. The data shows that you can quietly make money in quite diverse and specific sectors of the industry.
However, most of the divisions studied in the analysis are in broad and competitive areas. Yet, despite the competitive nature, there are wide variations in performance. In coatings and colours, for example, performances range from Ciba Specialities' coating effects division (21.1%) down to about 5%.
Overall, it is clear that although there are some ‘winning’ sectors to be in, it is not just what you do but also the way do it that matters a great deal.
This is the first in a series of articles based on the divisional analysis compiled by KPMG. For further information about the data collected please contact John Morris of KPMG on +44 (0)20 7311 8522 or Peter May on +44 (0)20 7311 8814.
Divisional analysis 2001 - the performers*
|* A selection of divisional performance data in chemicals|
|as compiled by KPMG|
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