ICIS Top 100 Chemical Companies

14 September 2009 00:00  [Source: ICB]


 Gareth JJ Burgess

2008 started out strong for the ICIS Top 100 Chemical Companies, but was a year of unprecedented turmoil and change. See how it all shook out

THE TROUBLE is that 2008 could not even be called a year of two halves. Sentiment switched rapidly in the global chemical industry through the four quarters, reflecting dramatic shifts in the operating environment.

As an introduction to this year's listing of the latest critical annual financial results of the ICIS Top 100 Chemical Companies by sales, this point has to be borne in mind.

Chemical producers began the year in relatively high spirits. The industry was still on the recent earnings plateau, and if not, only starting to come off it. Volume demand was strong. The high (and rising) oil price was a real driver, not so much of demand - although customers were always eager to buy ahead of possible raw material cost-driven price increases - but of prices and margins.

The prospect of significant new olefins and polyolefins capacity coming on stream in the Middle East and Asia continued to loom. Yet those clouds remained on the horizon.

Not all was bright, however. The impact of the subprime mortgage-induced financial meltdown became more widely apparent as the year progressed. At the start of the year, some companies were already being hit by the deflating housing bubble. US housing starts had been in decline since 2007.

Troubles in construction and automotive, key end-use sectors for chemicals, would eventually hit many players hard. Indeed, the link between chemicals, houses and cars would be exposed in 2008 like never before.

The latest ICIS Top 100 listing of chemical companies ranks producers by sales in 2008. It includes the largest public and private chemical makers, as well as the chemical businesses of the large oil producers.

We aim to use corporate data wherever possible, but in some instances the results of non-chemical segments are excluded to get closer to true chemical business figures. Any changes made to reported figures and any calculations made by ICIS are explained in the footnotes to the ICIS Top 100 table.

Chemicals find such wide use that it is hardly surprising that producers of all types, from bulk material suppliers to the more specialized companies, were hard hit by the eventual downturn in 2008.

The slump in output at the end of the year, driven by the recession and global industrial inventory destocking, was unprecedented.

That impact can be seen in the ICIS Top 100 table, but the sales data largely tell a story of strong, price-driven top line growth. The sales of many of the major fertilizer manufacturers, for example, grew fast in 2008, due to feedstock cost-driven price gains and volume gains, lifting them in the rankings.

But sales data from companies with financial years ended in March 2009 or later reflect the collapse of business at the end of 2008 and the extremely difficult operating conditions that persisted through the first half of 2009.

In the first quarter (Q1) of 2008, however, companies were not so much concerned with slowing volume growth as rising feedstock and energy costs.

Crude oil was priced around $90/bbl at the start of the year, having risen steadily through 2007. It hit a record $147/bbl in late July, but from August collapsed to around $30/bbl by the end of the year.

The oil price collapse triggered events that would help destroy chemical company profits. But at the start of the year, producers were still playing a happy game of catch-up.

US-based Dow Chemical, for example, reported first-quarter 2008 sales up by 19%, driven by volume gains and double-digit price increases in all geographic areas.

Earnings almost on a par with the first quarter of 2007 were achieved, despite the sharp increase in feedstock and energy costs.

Polyolefin producers were preparing for a supply-driven downturn.

Yet Chinese demand continued to be the draw for much of the industry as the country's ability to suck in raw material and intermediates imports of all kinds to feed its own export-driven industries continued unbowed.

At the start of the year, however, the ingredients for a broad US economic downturn were in place. And by late March, it looked as though the US economy was in recession.

The housing crisis was biting hard and housing starts and building permits were sharply lower. Oil prices were rising and the dollar weakening.

It also looked as though the whole US subprime mortgage crisis could take out the global financial system. At that time, however, chemical producers were most concerned with rising oil prices and their ability to pass on the additional costs.

By mid-year, oil was way past the $100/bbl mark. The ICIS IPEX global petrochemicals price index was soaring, but there were increasing signs that the chemical downturn was taking hold.

However, firms across the sector were still pushing price increases through and benefiting from emerging market growth, even if times at home were hard.

US-based DuPont, one of the world's largest diversified chemical players, saw Q2 net profits rise by 10.9% on 12% higher sales. Sales growth outside the US was a robust 18%.

Here is where the debate began to heat up on the "decoupling" theory - whether in fact emerging markets could decouple from mature economies, continuing to grow while the latter lagged.

The world's largest petrochemical players, however - such as ExxonMobil Chemical, of the US, the Anglo-Dutch Shell Chemicals and France's Total Petrochemicals - were having a hard time, with margins under considerable pressure.

In particular, anyone cracking liquids was hit hard by significantly higher feedstock and energy costs earlier in the year. Wherever possible, gas would be cracked.

And the rest, as they say, is history, or rather the story of the worst financial and economic collapse in decades.

Chemical companies faced a difficult Q3. The credit crisis hit with a vengeance in September, with the toppling of mortgage lending institutions in the US and the ­collapse of US-based investment bank Lehman Brothers.

The US government stepped in to rescue once sound financial organizations. Leaders of the G7 group of leading industrial and financial nations were forced to act decisively to underpin the struggling global financial infrastructure.

It was at the start of October that buying chemicals stopped in China. Business just came to a halt, US-based Celanese CEO David Weidman said at the time.

Companies were exposed in ways not seen since the early 1980s.

Germany's BASF, the world's largest chemical company, saw net profits fall by 37.5% in Q3, on high raw material costs and, at the time, losses related to the impact of hurricanes Gustav and Ike on its US Gulf Coast operations.

The hurricanes reflected the turmoil that was beginning to strike both global financial and industrial markets.

"The impact of the global financial crisis on the real economy is speeding up and hitting harder,"said BASF chairman and CEO Jurgen Hambrecht.

BASF reduced its full-year earnings forecast and its stock fell hard. Celanese's shares plummeted following Weidman's comments.

In the final quarter of the year, however, the full impact of hugely deflated oil prices, the global financial crisis and the threat of deflation were being felt.

And how the mighty have fallen.

The year 2008 will be remembered in chemical circles for many things, but not least having the tail end of a spate of mergers and acquisitions (M&A) activity that had reshaped large parts of the industry.

In July, Dow advanced its "asset light" strategy by agreeing to buy US specialty chemical maker Rohm and Haas for around $19bn (€13bn). However, plans to put a large portion of its commodity chemical and plastics assets into a joint venture with Kuwait's Petrochemical Industries Co. were thwarted at the last minute in December.

Dow has paid the price in 2009, as it has been forced to divest assets and cut costs to pay down debt and boost profitability.

BASF announced in September 2008 that it would buy Ciba Specialty Chemicals in a deal valued at $6.1bn. In November, US-based Ashland completed its $2.6bn takeover of compatriot Hercules.

At the start of 2008, US-based PPG Industries had completed its $3.2bn acquisition of Dutch paint maker SigmaKalon, while compatriot AkzoNobel finalized its £8bn ($13bn, €9bn) purchase of UK-based ICI.

This was only weeks after Houston, US-based Lyondell and Basell, of the Netherlands, completed their $19.4bn merger (on December 20, 2007) to create the world's third-largest independent chemical company - No. 4 in the ICIS Top 100 listing for 2008.

In December 2008, US chemical group Huntsman settled for $1bn, in cash and debt, its controversial merger deal with compatriot Hexion Specialty Chemicals, which had soured with the economy and industry outlook. Legal action was taken against the lenders for the deal, Swiss-headquartered Credit Suisse and Deutsche Bank, of Germany.

There was no doubt by this time that the business world had taken a significant turn for the worse. The highly leveraged companies, in particular, were in deep trouble.

Companies were hit by a massive decline in demand. Chemical facilities worldwide were shuttered or run at sometimes surprisingly low rates. Business activity was cut back as costs and employee numbers were slashed.

Companies, to their credit, responded rapidly to events and early action for most allayed the fears of employees that there was much worse to come.

Privately held UK-based INEOS began talks in November 2008 with 230 of its banks about credit waiver agreements on its loans.

Inventory holding losses for INEOS and other majors such as Shell in the fourth quarter were severe and helped drive big losses.

The other key events towards the end of the year - and running into 2009 - were the growing number of bankruptcies forced as companies struggled to manage interest payments at a time of greatly reduced cash flows.

Close to 70 US subsidiaries of Netherlands-headquartered LyondellBasell Industries filed for Chapter 11 bankruptcy protection in December 2008.

The company obtained the largest debtor-in-possession financing package on record from various banks to help keep it afloat.

In 2009, Chemtura was forced into bankruptcy, following in the footsteps of titanium dioxide maker Tronox, polyethylene terephthalate (PET) firm Wellman and the small biofuels producer VeraSun Energy, all US.

Q1 2009 showed no respite from the deep slump, with sales depressed and more firms in the red. Some relief in Q2 was driven by strengthening Chinese prices and demand.

Stimulus packages, put in place by governments worldwide to help revive ailing economies, began to take effect.

The ICIS Top 100 Chemical Companies snapshot view of the industry at the end of 2008 reveals a great deal, but can only dimly reflect the swings of fortune experienced by sector companies throughout the year.

The ICIS Top 100 report for 2009 is likely to tell a very different tale as companies battle against the tide and struggle to emerge from such a deep and damaging recession.

The ICIS Top 100 table is based upon the ICIS annual analysis of the performance of the world's leading chemical companies. Download a PDF of the Top 100 rankings


TOP 10 IN 1998

Company Sales
$m Change, %
Bayer 32,892 -0.2
BASF 32,401 -3.1
Hoechst 26,192 nc
DuPont 24,767 2.8
Dow Chemical 18,441 -7.9
Rhone-Poulenc 15,502 -3.5
ICI 15,410 -16.1
Elf Group 14,773 -0.6
Akzo Nobel 14,625 nc
Mitsubishi Chemical 12,912 -11.6
 SOURCE: ICIS  nc = no change

What a long time 10 years is in the chemical industry. Compare the table above with the main 2008 listing.

Three firms have disappeared - ICI, of the UK, Germany's Hoechst and France-based Rhone-Poulenc, all broken up via mergers and acquisitions. Three more have fallen from the Top 10 - Germany's Bayer, Elf Group, of France, and Netherlands-based AkzoNobel.

That leaves only BASF, of Germany, Dow Chemical and DuPont, both US, and Japan's Mitsubishi Chemical still in the Top 10. They are challenged by the chemical operations of two big oil majors (ExxonMobil, of the US, and the Anglo-Dutch Shell), two non-US/EU firms (Saudi Arabia's SABIC and China-based Sinopec) and two privately-owned giants (INEOS, of the UK, and Netherlands-headquartered LyondellBasell Industries).

While Shell and the then Exxon were 12th and 13th in 1998 respectively, these other four have essentially come from nowhere. SABIC was 33rd and Sinopec did not rank. INEOS and LyondellBasell have been assembled over the past five years from a range of petrochemical and polymer assets no-one else wanted.

Another key difference between the 2008 and 1998 tables is the negative sales growth experienced in 1998. All chemical producers had a really tough year 10 years ago, particularly as the Asian economic crisis began to have an impact.

Petrochemical producers also suffered from low global prices and the impact of overcapacity in major markets. Indeed, as now, the bottom of the petrochemical cycle beckoned.

In specialties, companies were hard hit by Asia's problems, with the knock-on effect felt in new growth markets such as Latin America and Central Europe.

In terms of sales growth over the past 10 years, SABIC leads the way, with a staggering eight-fold increase from $4.9bn to $40.1bn. Exxon is second, with sales up from $10.5bn to $58bn, due in part to the merger with Mobil.

The next fastest-grower is Shell, whose chemical sales have increased from $12.4bn to $49.1bn. In contrast, sales at industry leader BASF have increased from $32.4bn to $87.8bn.

ICIS Chemical Business

By: Nigel Davis
+44 20 8652 3214

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