15 September 2008 00:00 [Source: ICB]
The ICIS Top 100 Chemical Companies saw the good times roll in 2007, but 2008 brings a more challenging environment, testing their mettle
RIDING THE rollercoaster of soaring energy and commodity prices, global chemical industry players performed remarkably well in 2007. Most of the sector continued to bask in good times, with demand growth still high, but the US downturn began to bite, and, for some, life was harder.
In this issue, ICIS Chemical Business casts a sharp eye over the financial performance of the leading players in the industry - from the broad-based to the focused makers of chemicals, fertilizers and industrial gases.
The ICIS Top 100 Chemical Companies includes all chemical firms with annual sales greater than $2.5bn (€1.8bn). It charts the fortunes of a geographically diverse group of players that supply vitally important materials to the world's growing industries.
The ICIS Top 100 analysis captures a broad set of financial data for the world's leading chemical companies.
A total of 18 financial metrics are collected from the companies themselves, from annual reports and other sources. An array of ratios is generated from this data. The analysis looks at the 100 leading companies by sales, but data are also collected for smaller players to facilitate regional analyses.
We gather corporate, rather than divisional data for most firms to help with a broader ratio analysis. But for the major oil and energy producers, we look at the chemical operations only.
In 2007, the sector benefited from continued strong demand growth, particularly from the fast-developing economies in Asia, most notably China. Chemical demand from Central and Eastern Europe and from Latin America was also robust.
Much has been written about the impact on the sector of the sharp economic slowdown in the US, and in North America as a whole. The sharp downturn in the vitally important US home construction and auto sectors hit the industry hard, and continues to do so.
But the impact, largely in the second half of the year, was masked, to a great extent, by product and geographical diversity.
The analysis demonstrates clearly that the world's major chemical producers continued to grow strongly in 2007. It is not so readily apparent, however, that the momentum behind that growth has weakened.
Companies captured volume increases alongside all-important price gains. Shifting currency exchange rates also had an impact on the reported results, particularly the weakening of the US dollar and the strengthening of the euro.
The ICIS Top 100 table shows company results in US dollars, with year-on-year comparisons made in local currencies. Financial year-end exchange rates are used throughout.
Given the significant weakening of the US dollar in 2007, however, for the first time, this year, sales changes are given in the table in local currencies.
The average increase in sales in the diverse chemical sector was 10.8% in 2007 in local currency terms and 18.1% when converted back to US dollars.
The most impressive gains were made by the fertilizer and agrochemical majors, as might be expected, given the significant run-up in food and fertilizer prices over the course of the year.
Those commodity price increases colored the analysis for 2007 and underpin the main features of the industry performance analysis to be published in the September 29 issue of ICIS Chemical Business.
The world's largest processed phosphate fertilizer producer, US-based Mosaic, reported one of the strongest year-on-year sales increases for its financial year ended on May 31, 2008. The company's results overall demonstrated the fact that the fertilizer upturn continued strongly into 2008.
SABIC acquired US-based GE Plastics later in the year, while Givaudan had earlier acquired Quest, the UK-based ICI's fragrances business.
It was, however, volume and, to a greater extent, price that drove the top line of most firms over the course of the year.
Chemical demand globally continued to be strong in 2007. And although growth slowed markedly in the US later in the year, demand remained buoyant in Europe and especially strong in the BRIC (Brazil, Russia, India and China) nations. The year was colored by the sharply rising cost of oil.
Oil-based feedstock costs rose sharply, as did the burden of energy costs on all players. Companies were quick to pass on these higher costs, particularly those operating at the top of the chain and closest to fast-rising and volatile feedstock naphtha. Natural gas prices also climbed throughout the year, putting a burden on producers of olefins and other materials.
The momentum gained in the industry in recent years was also widely apparent in 2007 profit performance. Operating profits in the sector climbed by more than 12%. Net profits significantly improved.
Many companies were able to push stronger cash flows down to the bottom line. Dividend payouts increased and more firms used excess cash to pay down debt and/or to accelerate share buybacks.
The year was one in which more companies had more room to maneuver and were able not so much to flex financial muscle in terms of acquisitions, but to be astute in terms of growth, investment, and regard for shareholders. Despite the still good times, players continued to focus on efficiencies in 2007, illustrating the more cautious mind set of management. As costs rose, they were mindful of the prospects of an industry downturn.
MOUNTAIN OF NEW CAPACITY
The upstream petrochemical business and commodity polymer makers expect soon to face the consequences of a mountain of new production capacity due on stream in the Middle East and in Asia.
The center of gravity of this end of the business, as well as many more specialized chemical segments, is shifting eastward as chemical demand growth patterns change, and as new producers tap into sources of low-cost gas-based feedstocks.
The emergence of lower-cost capacities, in particular, will affect the performance of all olefins and polyolefins players. Less efficient facilities will be hard pressed to make money as sector operating rates are lowered. They are also likely to be saddled with high and volatile feedstock and energy costs.
The petrochemical firms were exposed in 2008 and particularly in the second quarter, as oil prices topped $147/bbl.
In 2008, global GDP forecasts and subsequently chemical sector forecasts were also lowered. The industry has come off its plateau of earnings performance and is facing an increasingly tough global operating environment.
First-half 2008 performance has held up relatively well, particularly for the more specialized players and those not overly exposed to the US. The second-half outlook, however, is not strong,
EFFICIENCY DRIVES GAINS
In 2007, sales per employee in the industry improved by more than 9%, reflecting sales growth but also the focus of many firms on employee costs. Selling, general and administrative costs for the group of companies for which the data were available increased only slightly.
The drive to greater efficiencies was reflected in the overall improvement in profits ratios. Net returns in 2007 in the Top 100 improved by 11%. Operating profit data were available for fewer companies on the list but the average operating return increase was 5.5%. Operating margins increased markedly for US-based specialty chemical firm Chemtura and fertilizer producers Agrium in Canada, as well as Mosaic in the US. French chemical giant Arkema's operating return more than doubled.
M&A AND THE CREDIT CRUNCH
Mergers and acquisitions (M&A) reached a peak in 2007 in value terms, if not in total number of deals. The credit crunch took its toll, but chemical deals have continued.
Some of the largest in recent history took place in 2007, including the SABIC/GE Plastics deal, and the merger between Netherlands-based Basell and US-based Lyondell Chemical. Other focused acquisitions reinforced the strength of companies such as UK chemical firm INEOS.
The year 2007 was one of consolidation for the sector. M&A has been less pronounced in 2008 but the industry is still enlivened by the moves of major players such as US-based Dow Chemical to focus on value-added specialty areas of business and move away from commodities.
The top players in chemicals are focused on lifting value added by operating more efficiently and delivering greater value to customers. The commodity players do that by maintaining plant efficiencies and logistics networks. The specialty chemical companies work more closely with customers.
The analysis also looks at capital expenditures and researach and development (R&D) spending. Not surprisingly, capital spending was higher in 2007 than in 2006, as profitability improved.
Research spending varied greatly in the sector, with R&D/sales ratios of between 0.5% and close to 9%.
The increase in spending in 2007 by some of the biggest companies in the industry is noteworthy as greater emphasis was placed on organic growth in changing industry times.
The ICIS Top 100 table is based upon the ICIS annual analysis of the performance of the world's leading chemical companies. Further details of this analysis are available from Lara Mcnamee: firstname.lastname@example.org
WHERE ARE THEY NOW?
Just how much has the chemical industry changed over the past five years? The answer is a great deal, and there is likely to be more to come. The industry Top 10 has been shape-shifted by sector restructuring and the emergence of new players. Producers from the Middle East, China and India have become more important and certainly bigger in a global sense.
The chemical industry was in a very different place in 2002. Companies started the year on something of a high note, but were soon mired in difficulties.
This quotation from our Top 100 report at the time is apposite: "If 2002 demonstrated anything, it showed that many companies would have to continue to do a great deal in terms of cost control and restructuring to squeeze more from less. As the year progressed, it rapidly became clear that earlier economic growth and manufacturing industry optimism were not sufficient to carry the day."
The year 2007 was markedly different, and the past few years have demonstrated just what chemical companies can do in terms of performance. Yet, as further features in our Top 100 analysis series will show, times continue to change - and fast.
The rapid and unprecedented run-up in the price of oil has hit the sector hard. The credit crunch and US economic downturn are having a global knock-on effect. There are great uncertainties for players in chemicals that are exposed to strong global forces. In 2008, companies are challenged to continue to perform in trying and, once again, difficult times.
TOP 10 IN 2002
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