INSIGHT: Eyeing a €1,100bn chemicals prize

22 November 2011 16:26  [Source: ICIS news]

By Nigel Davis

Magnifying growthLONDON (ICIS)--Chemical companies are likely to have to struggle harder to grow and lift profit margins over the next two decades, consultants Roland Berger suggested this week.

Despite the focus on emerging markets and new technologies, there is little to suggest that growth rates can soar, or even climb in the way they have so impressively over the past 20 years.

There are numerous reasons for this. Sector companies have managed successfully to ride the wave of industrial development in emerging markets and the consumer spending boom in the west.

At least one of these driving forces for growth for the industry is grinding to a halt as the so-called baby-boom generation in the west and in Japan reaches later middle age.

Roland Berger estimates that the global market for chemicals will grow to be worth nearly €5,000bn ($6,750bn) by 2030.

Chemicals is a €2,000bn business currently (2010). It adds, however, that: “Industry trends such as changing competitive structures, further market shifts toward Asia, shorter product lifecycles and increasingly difficult access to raw materials are negatively affecting growth rates and profit margins in the chemicals industry.

“Over the next 20 years, chemical companies will be competing for additional market share worth €1.1 trillion [€1,100bn].”

The consultants set themselves a by no means easy task in trying to quantify the industry’s growth prospects as well as develop credible scenarios for the sector.

They admit that chemicals markets develop in complex and diverse ways. The market challenges are region and segment-specific.

The industry was hit particularly hard in 2008-09 as demand from manufacturing in the west collapsed. Growth away from that slump has been strong, particularly in China and other emerging market economies.

"Growth will be driven to a disproportionately large extent by the Asian and special chemicals markets, which will also shape the future of the chemicals industry." Roland Berger partner, Alexander Keller says.

That much is relatively straightforward but the consultants drill down to consider three scenarios.

One, in which companies are driven by innovation, could deliver an industry with an output worth €6,000bn in 2030.

The base-case scenario, in which companies focus on leveraging innovation in mature markets and driving market activities and efficiencies in emerging markets, produces the €5,000bn figure.

Production could become more regionalised and growth slower as a result if mature markets stagnate and emerging markets produce only moderate growth. This will lead to limited R&D (research and development) investments and a sharper focus on costs, they suggest.

The problem for chemicals producers is that high growth opportunities are likely to become increasingly limited. The sector is influenced by internal and external factors and rivalry within it between competing companies is intense.

Even though there is a potential market worth an estimated €1,100bn up for grabs, chemicals in the North America Free Trade Agreement nations and in western Europe is forecast to grow only at 2% a year, just below GDP.

Demand in Asia, the Middle East and Latin America will drive the industry with growth rates in these regions of between 5% and 7%.

Plastics and specialty chemicals in Asia are the most attractive remaining high growth segments. Inter-company rivalries in basic and bulk chemicals, dependent as they are on regional and global feedstock access and costs, have largely been played out, Roland Berger suggests. But in specialties the game is more local – and Asian.

Private equity will be an important enabler for Asian players looking for western technologies to help develop their customer base.

The battle will be very much about technology and regional market access.

Up for discussion, the consultants suggest, are key questions, such as what strategy helps the firm achieve profitable growth in Asia; and is it worth pursuing a single or multiple business models.

Profits are likely to be eroded in slower growing, mature markets. Competition in chemicals is excepted to increase, not diminish.

And, Roland Berger asks, “Can I mitigate enduring volatility?”

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By: Nigel Davis
+44 20 8652 3214

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