INSIGHT: Chemical M&A as an indicator of market sentiment

24 May 2012 16:24  [Source: ICIS news]

By: Joseph Chang

Indorama production facilityNEW YORK (ICIS)--For a good indicator of market sentiment, look no further than merger and acquisition (M&A) activity – or the lack thereof.

When one of Asia’s most acquisitive chemical companies halts its multi-year buying spree, take notice.

Thailand-based polyethylene terephthalate (PET) producer Indorama Ventures (IVL) – the most prolific acquirer of assets worldwide over the past two years – is done with deals.

It is now in consolidation mode, said D K Agarwal, CEO of Indorama Polymers, an IVL subsidiary, at the Asia Petrochemical Industry Conference (APIC) in Kuala Lumpur, Malaysia.

Agarwal spoke with ICIS the sidelines of APIC 2012 on 18 May, and described difficult conditions in the PET market.

“Right now the mood is not so good and the stock markets are not so positive. Demand for PET is coming down and prices are dropping… Margins are also under pressure in the Asian markets,” he said. “Demand is not that strong but the next couple of months as the peak period comes in we may see a rebound.”

Long term, Agarwal is optimistic on the PET market, expecting 6–7%/year growth on the back of strong consumption in Asia, especially in China, India and southeast Asia.

But the near term is another story, reflected in the dour mood among many other APIC attendees.

China markets are extremely weak, nearly across the board, with any incremental volumes hitting prices. For example, increasing polyethylene (PE) exports from Iran are weighing on an already weak China market.

“Exports from Iran, particularly of LDPE [low density PE] and HDPE [high density PE] to China have risen in the last few weeks, pressuring prices,” said Mazlan Razak, senior consultant at Nexant, on the sidelines of APIC on 17 May. “While the volumes are marginal in the context of overall Middle East PE exports to China, the fundamental issue is weak demand in China.”

Widening international sanctions against Iran are pressuring ethylene exports, resulting in higher PE production, said Razak. And lacklustrre demand in China is magnifying the impact of these additional volumes.

As yet, there are no signs of an emerging demand recovery in China. Concerns about economic weakness in Europe and how China adjusts to reduced exports to the region are weighing on sentiment, he said.

Getting back to M&A activity and sentiment, the eurozone crisis is the leading factor causing the dramatic fall off in transactions, said Peter Young, president of US-based investment bank Young & Partners.

“The number one concern in the chemical sector today is the debt crisis in Europe. That is causing uncertainty and loss of confidence in the overall economic outlook,” he said at the ICIS World Surfactants Conference in Jersey City, New Jersey, US on 25 April.

The global chemical M&A market has shifted dramatically downwards, with only $6bn (€5bn) in deals completed in the first quarter of 2012 versus a record $82bn in all of 2011, according to Young & Partners.

The pipeline of deals announced but yet to close has also fallen in every quarter since the second quarter of 2011 – from a robust $34bn at the end of that quarter, to just $7.8bn at the end of the first quarter of 2012.

To get an idea of Indorama’s M&A activity, it completed its $795m buyout of US EO/EG producer Old World Industries on 1 April.

Over the past two years, it has also bought the PET assets of Indonesia-based Polypet Karyapersada; US-based polypropylene (PP) fibres producer FiberVisions; US-based producer Wellman’s European PET recycling business; and a 50% stake in Indonesia-based PET producer Polyprima.

Also, during that time it acquired Indonesia-based PET producer SK Keris; a 75% stake in Germany-based polyester producer Trevira; Poland-based SK Eurochem; US PET producer Invista’s US and Mexico PET assets; and Italy-based PET producer Equipolymers.

Now with Asia sentiment at such a low point, the question is: Are we due for a rebound?

Additional contributions from Nurluqman Suratman and John Richardson in Kuala Lumpur

($1 = €0.80)

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

By: Joseph Chang
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