INSIGHT: The pressure to move as landscape changes

08 June 2011 17:31  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--It can be argued that the financial crisis, downturn and subsequent recovery have accelerated structural market changes in chemicals.

The growth of business in China and wider-Asia has continued to the extent that the China market is a determiner of price in some products.

Producers in the Middle East have taken advantage of the situation and chased market share in hugely important polymers markets.

At the corporate level there have been further moves by emerging market players to gain footholds in European and North American feedstock supply, although the big, multi-billion dollar chemicals transactions have not been forthcoming.

A more favourable environment for mergers and acquisitions could see that change. Companies can’t stand still and have to take steps to seize greater competitive advantage.

New players in chemicals, specifically those born in emerging market economies, tend to work on relatively simple cost or market-based value propositions. And there is a view that these run contrary to the deeper-seated shareholder-value model dominant among longer-established chemicals groups.

The disruptive potential of this clash of ideas is only gradually becoming apparent, the consultants McKinsey suggested in a chemicals review last month. There are challenges for the newer players and what McKinsey analyst Florian Budde calls “the incumbents”.

“Not only are these newcomers playing by different rules, but they are also better placed to benefit from two of the key dynamics driving the industry’s future: control of advantaged feedstocks in a high-oil-price world, and privileged access to the most attractive consumer-growth markets,” Budde says.

“Incumbents that have ridden growth in developed and developing markets are now undercut by powerful new rivals with access to cheap feedstocks and the most attractive growth markets,” he adds.

There is a matter of degree in all of this, of course. If the newer emerging market players want to realise greater value-creating potential they will need more management, innovation and marketing expertise Some of this may be home-grown. Some may come through acquisition.

Established producers from North America, Europe, Japan and countries like South Korea have to decide whether they can compete - and where - based on feedstock, labour, innovation and marketing costs.

McKinsey believes that the incumbents can continue to do good business in “upmarket” and “down-market” areas where there are relatively impregnable niches. It cites flavours & fragrances, market focused coatings, leather chemicals and water treatment chemicals as examples in the first area. Sulphuric acid, hydrogen peroxide, industrial gases and caustic soda lie in the second.

Between the poles, business life may be difficult with producers having older plants in the wrong place for growing market demand. Challenged by imports, they may have to decide either to tough it out or to be among the companies consolidated. Sometimes it pays to be “the last man standing”.

Given the speed of the recovery in the emerging markets, McKinsey suggests that the time left to engage with newer producers may be limited.

“The number of exceptionally resource-advantaged countries is finite, and major emerging markets such as China may pursue a policy of favouring domestic champions. Incumbents should use any momentum gained from recovery in their traditional businesses to advance their positions in the new industry landscape.”

Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog
Read Paul Hodges’ Chemicals & the Economy blog


By: Nigel Davis
+44 20 8652 3214



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