03 January 2007 12:01 [Source: ICIS news]
LONDON (ICIS news)--The global chemicals industry is expected to get off to a good start in 2007, but could weaken in the second half due to low demand, fears of overcapacity and limited pricing power as the sector has reached its peak, Barclays Capital said on Wednesday.
“Vertically integrated chemicals will continue to withstand volatility. However, we believe that the ability of specialty chemicals to improve margins will be constrained by weaker demand and that this may spur acquisitive activity to maintain volume and market positions,” the analysts said in a note to clients.
They said Bayer and Linde represented ownership stability, but that for the remaining names in the industry mergers and acquisitions and leveraged buyout risks would be the key drivers of spreads and balance sheet targets.
“We note that Lanxess remains keen to carry out a transformational acquisition. Akzo’s growth strategy is strongly predicated upon acquisitions to boost coatings and chemicals, and has been linked to ICI’s paints activities under a break-up scenario of the latter,” Barclays Capital said.
“We believe that while ICI and Syngenta are strong credits, they represent attractive targets to a larger buyer.”
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“This supports our view that sectors such as chemicals and building materials will seek further bolt-on acquisitions in these areas,” the analysts said.
“In chemicals, we note that the demand-side has also shifted its production base to high-growth geographic regions, thus supporting a geographic shift further.”
For the commodity sector, Barclays expected cost competitiveness to be a key driver as overcapacity starts to build up, with growing competition from
Competition in the specialty chemicals sector, however, was expected to come from smaller regional players.
The analysts added that demand may weaken in late 2007 if buyers were to expect a fall in crude oil prices.
“Although the outlook for oil in 2007 is strong, fears of overcapacity may cap any raw material price increases – for example, ethylene production capacity in the
They added that overcapacity in
Operating margins have weakened across the board, the analysts said, due to acquisitions, restructuring and a late shift to a lower-cost production base.
“We believe that profitability will remain steady in 2007 rather than improving as benefits from lower raw material costs are muted by weaker demand and pricing power is low for both commodity and specialty players,” they said.
“Increasing regional competition and commoditisation is further driving margin pressure that can only be offset by volumes, provided the sector is capable of securing growth in emerging markets.”
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