Cream of the crop (top 100 companies)
01 November 2006 12:29 [Source: ICB]Once again, it is time for the ICIS Top 100 listing of global chemical producers. Nigel Davis looks at how events over the past year have affected the results
Buoyant demand helped drive the chemical industry in 2005 towards another year of strong growth, despite the setbacks of the devastating US Gulf Coast hurricanes. As in the banner year of 2004, the leading players in the sector pushed sales higher on the back of stronger volumes and particularly on higher prices.
Profits were harder won, given the almost relentless increase in the price of oil and gas-based raw materials and energy. The year was characterised by continued strong top-line growth for the petrochemical players, stronger profits growth and higher costs passing down the chain.
However, the cyclical upturn lost a great deal of its strength over the course of the year, although generally tight supply/demand balances buoyed prices and helped maintain margins. Self-help in terms of restructuring has been a perennial feature of the sector, and in 2005 companies continued their quest to drive down the break-even point. Merger and acquisition (M&A) activity continued apace with one of the biggest deals in recent times – BP’s sale of Innovene to INEOS, concluded at the year end.
The ICIS Top 100 listing of global chemical producers charts the changing face of the sector. Strong sales growth in 2005, as in 2004, now means that a company has to turn over more than $2bn (€1.56bn) to be included in the listing. This compares to a figure of $1.4bn in 2004 and close to just $1bn two years ago.
Corporate figures are used wherever possible to ensure that the maximum amount of financial information can be included. The Top 100 listing is based on the ICIS group’s annual company analysis, which includes 19 measures on which financial and performance measures for the leading companies in the sector can be based. Company analysis spreadsheets covering the years 2000 to 2005 are available. Previous years dating back to 1978 are held in electronic and paper format.
Top of the listing again in 2005 is BASF with group sales of more than $50bn, 14% higher than in 2005. The entry is based on group figures for the company whose oil and gas business has contributed windfall sales and earnings for the past two years. If oil and gas is excluded, BASF holds second position in the table after Dow Chemical, another strong, although hurricane-affected, performer in 2005. BASF’s sales in 2005, excluding oil and gas, rose 8.7% to $41.6bn.
At the end of 2005, BP concluded the sale of its Innovene business – comprising refinery, olefins and derivatives businesses – to privately held INEOS. BP retained an extensive aromatics and acetyls business portfolio and important petrochemicals investments in China – the SECCO joint venture – Malaysia and Germany. We have included an estimated sales figure for INEOS for its chemicals businesses, excluding the refinery operations. The BP estimate is for aromatics and acetyls only, based on 2004 reported numbers. BP no longer gives details of its petrochemicals financial performance.
In April 2005, the BASF/Shell polyolefins joint venture, Basell, was finally acquired by Len Blavatnik’s Access Industries. The sales figure shown is an estimate of its turnover for the full year.
A newcomer to the listing for 2005 is Hexion, created by Apollo Management at the end of May 2005 through the merger of Borden Chemical, Bakelite, Resolution Performance Products and Resolution Specialty Materials. The merger demonstrates private equity’s role in the year as a catalyst for change across the sector.
In 2005, the global chemical industry completed $33bn in transactions – up from $31bn in 2004, according to investment bank Young & Partners. However, the number of deals valued at more than $25m fell from a record 85 in 2004 to 73.
Nine deals were above $1bn in size in 2005, including the INEOS acquisition of Innovene, Access buying Basell, Cytec Industries buying UCB’s chemicals activities for $1.8bn, and Crompton’s purchase of Great Lakes Chemicals, also for $1.8bn, to create Chemtura, a company that appears in the table for the first time. In petrochemicals, Lyondell’s consolidation of Equistar boosts the group up the table.
M&A activity has accelerated into 2006, with major deals including BASF’s purchase of Engelhard and Degussa’s construction chemicals activities, and the acquisition of BOC by Linde taking the German gases and materials handling company to the top of the industrial gases league table.
The Total chemicals operations are shown in the table as they stood in 2005, including the petrochemicals and speciality chemicals businesses. The newcomers in the business for 2006 will include the energy giant’s speciality chemicals spin-off, Arkema, which had proforma sales of $7.1bn for 2005.
The table includes Bayer’s May 2005 chemicals spin-off Lanxess, which has been active over the past 18 months realigning and reshaping its portfolio.
The growing importance of new players in Asia is apparent in the rankings, with sharp sales increases in 2005 for China’s leading chemicals producer, Sinopec and others. New production capacity started up in China in 2005, including the BP joint-venture, SECCO, cracker, BASF’s plants at Nanjing, and units at Shell’s Nanhai joint-venture petrochemicals complex at the very end of the year.
The build-up to commercial capacity of these and other production units in the sector downstream, as well as up, is shifting the balance of the industry away from the more well-established producing and consuming regions.
Figures shown for the major Japanese producers include the most up-to-date numbers for fiscal 2005/06. The data for chemicals at Sasol are for the year to June 2006.
Producers battled in 2005 with high and volatile raw material and energy costs and, in the latter half of the year, the widespread impact of hurricanes Rita and Katrina on production and markets on the US Gulf Coast. The widespread destruction hit US chemicals production growth hard.
North American chemicals output was hit hard by the storm leading to a 0.2% drop in production for the year, according to data from the American Chemistry Council. Chemicals production globally rose by 3.6% in 2005. Growth was strongest in the Asia-Pacific, Africa and the Middle East, and in Latin America, with annual year-on-year output growth rates around 7%.
A feature of the second half of the year was the rapid increase in some product prices. For example, the impact of higher priced oil was not felt in the North American and European benzene market until very late in the year, and particularly in the first months of 2006.
Speciality chemicals producers battled throughout 2005, with higher oil-based feedstock costs. A lack of pricing power in the market was apparent until later in the year. The impact is seen in the significantly lower profit increases from this group of producers in 2005, compared to petrochemicals or more broadly based commodity and speciality chemical makers. The commodity/speciality split was exemplified by the stronger operating profit margins reported by the more broadly based producers and the leading petrochemical makers. Low double-digit returns reflect a year of strong profits, as well as sales growth for the larger, diversified chemical makers and certain commodity players.
The data show that producers were prepared in 2005 to plough more cash back into the business in the form of higher capital, and research and development spending. Capital spending rose steeply in 2005 – by 26.9% for the Top 100 companies. This suggests that for some petrochemicals chains, the seeds are being sown for an oversupply-driven downturn.
The build-up of commodity and speciality chemicals capacity in China is also a feature of the sector. The expected significant increase in petrochemicals capacity in the Middle East plays its part in tempering the ambitions of players in less cost-effective producing regions of the world.
Industry research spending was raised by 7.0% on average in 2005, well above the level of inflation. The numbers employed in the sector, on average, were unchanged from 2004.
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