The ICIS Top 100 Chemical Companies: Analysis

12 September 2011 00:00  [Source: ICB]

 

Chemical companies roared back in 2010
Fueled by strong recovery in mature markets, continued growth in developing countries and pricing power, the global chemical sector pulled out of the downturn strongly in 2010

The world's leading chemical companies moved from strength to strength in 2010, achieving considerable sales, margin and profit growth as they built on an improving global economy.

The ICIS Top 100 listing of the world's major players in chemicals highlights the significant gains made by most.

The ICIS analysis covers the leading producers of chemicals, including public companies and the chemical units of the integrated oil majors.

This is an impressive group of producers that together generated a total of $1.23 trillion (€932bn at December 31, 2010 exchange rates) of sales in 2010, up by more than 20% compared with the previous year.

The sales gains - driven by strong emerging market growth and the expanding developed world economies - helped to drive profits higher. Together, the companies were able to more than double net profits.

BASF COMES OUT ON TOP
The annual league table shows that ­Germany's BASF remains the world's largest chemical producer by sales, with 2010 sales of $84.65bn.

US-based Dow Chemical closely beat the chemical business of ExxonMobil, also of the US, to claim the second place slot with $53.6bn. The top five chemical companies produced sales of $282bn in 2010, and the top 10 sales of $466bn. The Top 10 - of those that declared the data - earned some 42% of the net profit total of the Top 100.

An exceptional year by any standard, 2010 delivered more than most chemical companies dared to hope for at the start. Still in recovery mode, the sector produced returns well above expectations.

Nervousness around mid-year was soon swept away as companies continued to deliver strong results on the back of growing demand and higher prices.

The ICIS Top 100 Chemical Companies listing illustrates the renewed strength and vigor common across the sector.

The major chemical companies are involved in a diverse range of businesses, producing commodity, specialty and fine chemicals as well as related services. Their products are the raw materials of industrial growth and underpin consumer demand.

Benefiting from the fiscal stimulus packages introduced by governments worldwide to kick-start the global economy, chemical makers were among the first to demonstrate clear signs of recovery from the 2008-2009 slump.

Running into 2010, they were able to capitalize on booming emerging markets demand, particularly in China.

Developed world growth was less robust but proved vitally important.

The ICIS Top 100 Chemical Companies produced a 22.1% increase over 2009 in sales in local currencies in 2010 (a 24% increase when converted at year-end exchange rates into US dollars). Operating profits were 2.3 times higher in local currencies and operating margins up 1.8 times. Net profits were 1.7 times ahead.

This level of performance was recognized by investors. The Dow Jones Global Chemicals Index improved by 24.3% over the course of the year, while the S&P 500 index managed a gain of only 9.8%. The ICIS listing illustrates the sharp rise in sales values seen by most chemical companies. Suppliers of commodities fared better than specialty makers as they benefited from the return of industrial activity in the major global economies.

Volumes were pushed somewhat higher in Europe and North America, but grew particularly strongly in emerging markets. Emerging market demand had buoyed some companies, helping them to survive the extremely difficult late 2008 to early 2009 period.

By 2010, however, chemical market demand had moved past recovery mode into a period of strong growth. Linked closely to the price of oil-based feedstocks and the cost of energy, chemical prices rose sharply over the year. The ICIS Petrochemical Index (IPEX), which is based on a basket of prices of the key olefins, aromatics and polymers, rose by 14.5% in 2010. Prices for key building block petrochemicals were pushed higher as developing world demand surged, particularly in Asia. Prices of other commodity chemicals also rose sharply as global markets tightened.

 

Companies did a solid job managing costs and capital
A RECORD YEAR
For some producers, 2010 was a record year. BASF hit new highs as it took advantage of a stronger than expected economic recovery. ExxonMobil's chemical unit's earnings hit a new record on much stronger margins and improved volumes.

Companies upstream in particular were able to lift sales and earnings on the back of higher prices as they passed on higher feedstock and energy costs. The price of oil and feedstock naphtha increased markedly over the course of the year. The Brent crude basket futures price climbed by 17.3%, while ­naphtha rose in Europe to $853/tonne from $727/tonne and in Northeast Asia to $886/tonne from $742/tonne. Ethane prices in the US moved to 64 cents/gal as natural gas prices fell to $4.287/MMBtu from $5.637/MMBtu.

Petrochemical and commodities players registered the greatest increases in sales in 2010, with Canada's fertilizer producer PotashCorp, Malaysia's oil company PETRONAS, Brazilian petrochemical firm Braskem, South Korean producer Honam Petrochemical, Canada's plastics and chemicals producer NOVA Chemicals, US-based fertilizer manufacturer CF Industries and China's petroleum and petrochemical specialist Sinopec registering gains of more than 50%.

Sinopec's growth in chemicals was clearly driven by strong stimulus-led demand in China. That demand underpinned growth for many firms in the sector, particularly those supplying plastics and chemical intermediates to China markets. China's polyolefins imports, for instance, rose by 53% between 2008 and 2010, or by 6.3m tonnes.

Many chemical companies benefited from strong emerging market growth. For the largest companies, sales increases of 25%-plus (for Saudi Arabian chemical giant SABIC, Anglo-Dutch major Shell, ExxonMobil's chemical unit, Switzerland-headquartered INEOS, BASF and Japan's Mitsubishi Chemical, translated into significant profit gains. Mitsubishi Chemical and most of the Japanese companies in the Top 100 listing operate in a fiscal year that ends on March 31. Data are shown for the most recent full-year period.

Companies moved from loss to profit in 2010 as margins improved. Only two firms, Italy's petrochemical business Polimeri Europa and Mexico's oil and petrochemical firm PEMEX, reported an operating loss (earnings before interest and tax - EBIT) for the year.

Momentive Performance Materials Holding and chemical company Huntsman, both of the US, made the most significant percentage gains in profits at this level. BASF, SABIC, Germany's gases and engineering group Linde, US-based chemical company DuPont and ExxonMobil's chemical business generated the most EBIT in 2010.

US-based specialty business Rockwood, Germany-based specialty chemical companies LANXESS and Wacker Chemie, Austria-headquartered polyolefins business Borealis, Mitsubishi Chemical and Japanese ink producer DIC showed the strongest gains in net profits.

The top earners in the industry were Netherlands-based polyolefins producer LyondellBasell, which booked a net profit of $10.15bn following its 2009 loss of $2.87bn and its emergence from Chapter 11 bankruptcy protection in the US in April, as well as BASF, SABIC, ExxonMobil's chemical unit, DuPont, US-based phosphate producer Mosaic and Belgian chemical company Solvay (which booked a gain on the sale of its pharmaceuticals business).

COST CONTROL AND CAPITAL DISCIPLINE
Firms benefited from higher prices and stronger volumes through the year. But they also continued to manage costs and spending aggressively.

Some of the largest companies in the industry had the lowest selling, general and administrative costs as a percentage of sales in 2010 - BASF and LyondellBasell.

Employee numbers have been contained since the 2008-2009 slump, with most companies still cutting back in 2010. Those changes can be seen in the ICIS Top 100 table.

Sales and profit per employee data for the sector show how well some players performed last year. Traditionally, the chemical firms of oil majors tend to have the lowest number of employees associated with their businesses, given that they share personnel with their parent.

They also tend to have the highest sales and profit per employee ratios. Nevertheless, some of the big producers, such as INEOS and LyondellBasell, have strong employee ratios given their focus on cost efficiency.

The ICIS data show that many companies took the opportunity of high cash flows to reduce debt in 2010, although net debt levels for some rose as they sought new mergers and acquisitions (M&A) opportunities.

The capital spending numbers give some indication of this renewed interest in M&A, as well as higher spending on property, plant and equipment, which rose by a healthy 11.9%.

Encouragingly, research spending increased by 5.3% as producers continued to pump more money into innovation. Research and development (R&D) to sales ratios varied widely across the industry as expected given the diverse product portfolios across the sector.

The R&D to sales ratio in 2010 was the ­highest for Germany-based chemical and pharmaceutical firm Merck KGaA, Switzerland-based agribusiness Syngenta and flavorings manufacturer Givaudan, as well as Japanese chemical giant Sumitomo Chemical, while seven companies had a spending rate of more than 5%.

Download the complete ICIS Top 100 listing in pdf


By: Nigel Davis
+44 20 8652 3214



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