28 September 2009 09:00 [Source: ICB]
The Germany-based specialty chemical producer spun off from Bayer in 2005 has come a long way, taking the top spot for financial performance in 2008
THE WORLD'S chemical producers faced unprecedented challenges in 2008. The deepening credit crisis strangled customers and end-use markets. Feedstock and energy prices fluctuated wildly. Ultimately, companies faced a downturn the likes of which had not been experienced since the early 1980s.
The listing of the key financials of the ICIS Top 100 Chemical Companies, published in the September 14 issue of ICIS Chemical Business, reflected the turmoil. This analysis, based on the core data, attempts to look behind the scenes and pinpoint important performance characteristics.
Chemical producers intimately linked to important industrial end-use markets, such as automobiles and electronics, and to vital sectors such as construction, felt the full weight of the downturn and continue to do so.
In giving the 12-month view, the ICIS Top 100 listing did not reflect the quarter-by-quarter turmoil. The steep rise in the price of oil towards the middle of the year and beyond had a marked impact on business. The subsequent collapse of oil and commodity prices tore though global chemical markets.
Demand growth halted in the fourth quarter (Q4) and crumbled at year end as customers destocked and prepared for the worse. Entire supply chains were affected. No chemical producer was immune.
The annual financial data for the major sector companies reflect this. The metrics indicate resilience, built or acquired over an extended period of profitability for most. But they also show that individual producers in 2008 were hit hard in the second half.
Against this backdrop, some companies were able to perform better than others. Businesses such as fertilizers benefited greatly from soaring prices through much of the year. The annual data for many of the fertilizer majors illustrate this.
The ICIS Top 100 analysis illustrates individual product line strengths but also underscores segment and regional differences. Undoubtedly, petrochemical and commodity chemical businesses were hard hit at the end of the year, but the full-year data also reflect the still strong early months of 2008.
Specialty chemical producers faced feedstock cost increases in the first half, driven by rising oil prices. They also faced demand destruction toward the year end.
That collapse in demand, particularly, forced companies to react fast. And to their credit, they did. By year end, cash was king. It would remain so through the first three quarters of 2009, at least.
LANXESS had to be as flexible in 2008 as the synthetic rubber it makes
Operating profits and margins were dented in the latter part of the year, but major companies were able to maintain annual profits and some generated considerable increases compared with 2007. Fertilizer producer profitability increased markedly in the first three quarters of the year but fell thereafter.
None of the Top 10 firms by sales posted an operating profit gain for the year. Three in this group were among the 17 in the ICIS Top 100 listing to report operating losses.
At least 2008 started off rather well. Companies were in a position, through the first half, to pass on higher feedstock and energy costs in higher product prices. Demand was yet to plunge from what would prove to be unsustainable highs.
Q4 BITES HARD
The slump in Q4 output and sales driven by massive destocking through multiple supply chains hit all chemical companies hard. Sales declined with prices and much lower volumes. The nadir was reached in Q1 2009, with many firms announcing losses, some at the bare bones operating level.
Companies did what they could to retain cash. Plants were shut down - or run at reduced rates. Employees were let go, while others were put on short-time hours.
The ICIS data may reveal sectoral and regional trends, but it is the individual company stories that come to the fore.
Germany-based polymers producer LANXESS stands out as a strong performer and is the worthy recipient of the ICIS Chemical Company of the Year Award.
LANXESS was created in 2005 as a spin-off from German giant Bayer. Subsequently, it has pursued growth with a focus on Asia and Latin America. The numbers for 2008 speak for themselves. The company produced what can be described as a solid performance in an extremely difficult year.
The headline to its 2008 annual report: "Continuity meets flexibility" perhaps says it all. LANXESS had to be as flexible in 2008 as the synthetic rubber it makes. Its management and workforce reacted promptly and effectively to the downturn. But the company achieved its growth and financial targets over the course of 2008, a year ahead of plan.
LANXESS' sales fell by 0.5% in 2008 to €6.27bn ($9.27bn) but, importantly, operating and net profit were up by 50% and 53%, respectively, as the company's core businesses expanded in the first half.
The analysis looks at financial measures and ratios and is local-currency based on core performance measures as well as year-on-year comparisons. They illustrate the heights reached by the world's fertilizer and agrochemicals makers, where LANXESS also stood out as a stellar performer.
Also in the group of strongest performers were South Korea's LG Chem, Belgium's Tessenderlo, Netherlands-based DSM, and National Petrochemical Co. of Iran.
Growth was still a feature of the industry in 2008, with 25 out of the ICIS Top 100 reporting sales growth greater than 10% for the year in dollar terms. The profits story was somewhat different, with 17 out of the 100 reporting an operating loss for the year and operating profits down sharply for most.
Among this group were industry giants the Anglo-Dutch major Shell and INEOS of the UK, as well as Dutch major LyondellBasell Industries.
Inventory holding losses featured in some company accounts. A total of 24 out of the ICIS Top 100 reported a net loss for the year.
Profit margins for chemical makers suffered as business slowed towards the end of the year. Annual operating margins for firms such as LANXESS and LG Chem, however, grew strongly. A total of 10 out of the Top 100 managed to lift operating margins by more than 20% over the course of the year.
At the other end of the scale, operating margins contracted by more than 20% for 33 companies, not including those posting
A total of 24 out of the ICIS Top 100 reported a net loss for the year
It is the net result that tells the tale, and the net profits table for the sector makes salutary reading. Steep profit declines were the order of the day for much of the sector. Commodity producers were hit hard. Even low-cost producers suffered. More than half the companies reported a lower net result for the year, including those that dropped into loss.
Net margins across the diverse group of companies were widely different but illustrated the impact of exceptional circumstance. Some companies were able to produce a margin at this level for the year well above 10%. Others struggled to reach single figures.
The productivity ratios show how the sales and profit downturn affected so many. Firms cut back hard at year end, but that is not necessarily recognizable in the full-year figures.
Driving costs down, however, and productivity up has become a vitally important task for all players. It is not unreasonable to assume that employee numbers across the sector will be lower in 2009. How that translates into productivity remains to be seen.
LANXESS: THE SECRETS OF SUCCESS
"2008 was a remarkable year. The results in the first nine months highlighted that LANXESS is pursuing the right strategy of profitable growth. Our formula for sustainable success is based on a business portfolio focused on innovative specialty chemicals, leading market positions, regional diversification and entrepreneurial management.
"Then came practically overnight an economic downturn of historic proportions, which impacted our results in the final quarter. Our restructuring skills from the time of our spin-off in 2005 were called upon again and we reacted swiftly with a package of cost-saving measures, as well as capital discipline, which will ensure that LANXESS will emerge strengthened from the crisis."
Axel Claus Heitmann, CEO
PROFIT DATA FOR THE TOP 20 GLOBAL CHEMICAL COMPANIES BY SALES, 2008
|Company||Net profit ($m)||Change (%)||Net margin||Change (%)|
SALES PER EMPLOYEE FOR THE TOP 20 GLOBAL CHEMICAL COMPANIES BY SALES, 2008
|Company||Sales per employee 2008 ($)||Change (%)|
|SOURCE: ICIS DATA & ANALYTICS NOTES: 1. Chemicals only; 2. March 2009 year end|
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