INSIGHT: Chemical executives keen to use cash but still worry

18 September 2012 17:10  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Research from business advisors KPMG has confirmed that chemical industry executives are keen on using cash on the balance sheet for acquisition-led as well as organic growth.

The issue is particularly relevant for players based in Europe. They have had a tough time in the past 12 months and recovery from the 2008 trough has hardly been easy.

KPMG’s June survey of sector executives paints a largely positive picture and a more positive outlook as regards M&A (merger and acquisition) activity than in earlier polls. The operating uncertainty remains though and the fallout from the eurozone crisis hangs heavy in the air.

“The return of deal activity, particularly in western European countries, could prove to be the light at the end of a very dark tunnel for the sector as a whole,” global COO of KPMG’s Chemicals and Performance Technologies practice, Paul Harnick, says.

“Recent years have seen a number of commentators speculate that the future of the European chemicals industry is under threat as a result of rising energy costs and increasing competition from low-cost suppliers in the emerging economies. However, the good news is that Europe’s chemicals companies appear to be shrugging off any such concerns and are instead attempting to tackle the issue of growth head on.”

That may be the case but actions speak louder than words. Commentators have also pointed to the slowdown in the value of chemical sector deals in 2012 compared with 2011. But some reckon that this does not mean that activity is compromised.

This is hardly the best time for an IPO (initial public offering), and it may not be the best time to be seeking support for a highly leveraged transaction. But company to company deals are being discussed. And private equity is far from inactive in the sector.

There are a number of deals to be done across chemicals before the year end, some have suggested. They may be (relatively) low key but they illustrate the continued search for growth and for value.

“Certainly the improved cash positions at many of these companies will allow them to be more aggressive to drive growth and innovation – both organically and inorganically. We therefore predict an uptick in M&A over the next two years as organisations begin to put their money to work in order to gain that vital competitive edge,” Harnick said

Companies are not necessarily looking for the big deal but as work from M&A advisors the Valence Group suggested earlier this year there is quite a lot of low level activity.

BASF commented recently, for instance, on the battery technology acquisitions it has made so far in 2012. The chemicals giant created a new battery materials business in November 2011 and since has acquired Sion Power, Ovonic Battery and Novolyte Technologies, all US-based battery technology firms, and agreed to acquire Merck KgaA’s electrolyte business for high performance batteries.

“Large chemicals companies in Europe are on the look-out for opportunities to reorganise their portfolios to better suit these more straitened times. The top trump assets are therefore those speciality businesses which have high intellectual property value and which operate at high margins. Intrinsically, high technology businesses also have the magic ingredient of high barriers to entry, which makes them particularly attractive for those with cash to spend,” KPMG’s Harnick says.

The prospect of an increased level of M&A activity has been hanging in the air for most of the year and is set against the backdrop of a continued uncertain operating environment.

This is a particularly taxing time for European players given the opportunities for growth that are still being advanced for emerging market economies and for feedstock driven production expansions, particularly in North America.

“Executives in Europe are certainly more concerned about the state of the global economy than their counterparts in the US and Asia. Balancing potential global economic risks with the need to expand into new products and markets to capture growth will be the key to success,” KPMG’s chemicals COO adds.

There was more evidence published on Tuesday on the way that chemical producer margins are being squeezed by rising sequential cost increases. Commodity chemical prices may be up but as these are fed down different product chains the pain is simply passed on to the customer.

In Europe, costs have been falling sequentially for some months but the recent uptick in the price of crude oil suggests that costs will stabilise over the next few months, analysts at Bernstein Research said. Prices in July, however, fell faster than costs.

Gains on the spreads between prices and raw material costs have been made by for the past two years in Europe and in the US, Bernstein’s research shows, but the differentials narrowed in July and August as costs rose.

Commodity chemical producer have, unsurprisingly, been more exposed and were squeezed in July/August by 6% year-on-year drop in prices in both regions because of petrochemical price declines, it adds. The price falls are most likely due to weak volume growth, it says.

The Bernstein research and that KPMG survey results provide colouring for the almost day to day, hand to mouth existence that is prevalent across much of the sector. Longer term plans notwithstanding, this remains a difficult time in which to commit large sums to one project or another.

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

By: Nigel Davis
+44 20 8652 3214

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