Market outlook: Global economy hits chemicals

06 September 2013 10:10  [Source: ICB]

Many companies struggled to maintain revenues and profitability during 2012 in the tough global economic environment

Positions in the ICIS Top 100 deck of chemical producers were only lightly shuffled in 2012 as global economic growth stalled and with it chemicals demand.

A handful of new companies entered the listing and there were some movements in the rankings among the major players - the Top 100 cut-off now is just over $3.5bn in annual sales - driven by merger and acquisition (M&A) activity and internal business realignments.

 Some reshuffling in the Top 100

Copyright: Alamy

The rankings show that most producers struggled to push sales higher against the backdrop of the difficult economic environment. Margins were under pressure from higher oil-based feedstock costs.

BASF remains the world's largest producer of chemicals although its performance in 2012 rested heavily on its oil & gas segment, the figures for which are retained in the ICIS analysis.

The Top 10 producers in 2012 reflect the diversity of the sector.

The giant petrochemical and polymers producers represented here are diversified chemical players who have in recent years focused on more specialised and often higher value product lines.

Pushing for growth in so-called specialties, and in chemicals aligned to specific end-uses sectors such as food and agriculture, some companies have retained their place among the largest in the sector.

Meanwhile, growth in basic petrochemicals and plastics, driven by industrial and consumer demand has pushed some of the major petrochemical and polyolefin producers higher.

Positions in the table show how investments in high growth markets and in low feedstock cost regions have paid off.

SINOPEC'S GROWTH
The chemicals operations of China's Sinopec, for instance, have grown significantly over the past 10 years, lifting the company from 29th in the ICIS rankings for 2002 to the number two slot for 2012.

Saudi Arabia's SABIC has moved from 14th to 5th position over the same period.

Among the players to hold their Top 10 slot in the league table are BASF, Dow Chemical, DuPont, ExxonMobil and Mitsubishi Chemical.

Apart from ExxonMobil, the companies have tended to diversify from petrochemicals towards agriculture (and nutrition in DuPont's case), and towards more consumer-oriented chemical intermediates and materials.

Nevertheless, strong petrochemical and polymer growth over the past decade has helped lift the chemical operations of ExxonMobil in the rankings, while there has been strong sales growth for chemicals at Shell and at Total, which 10 years ago was represented by Atofina.

Slower demand growth from China hit most of the larger producers.

Tapping into China's growth has been a major strategic challenge for many players in the chemical industry in recent years. And since the 2008-2009 crash, they have relied heavily on government-stimulus driven China demand growth for chemicals to help boost their own sales.

Chemicals demand growth in the US has been lacklustre against the backdrop of a slowly recovering economy and a troubled housing sector. Demand growth in Europe has been weak as countries in the region have struggled out of recession and implemented austerity measures to help manage high debt levels and the eurozone crisis.

CHEMICALS OUTPUT SLOWS
Industry data show that the growth of total shipments of chemicals and pharmaceuticals dropped to 1.1% in 2012 from 2011, having grown sharply (by 19.8%) the previous year. Those shipments were worth $4.97 trillion in 2012.

The data, collated by the American Chemistry Council and drawing on numbers from global chemical trade associations and other bodies, showed that chemical shipments were lower in North America, Latin America, western and eastern Europe in 2012, flat compared with 2011 in the Middle East and only higher in Asia-Pacific.

A calendar year of two halves, 2012 saw early optimism for continued strong growth away from the depths of the 2008-2009 recession give way to increased nervousness about further economic expansion.

That nervousness has persisted into 2013 with most producers finding the going difficult enough to modify their earlier more optimistic outlooks for the full year.

By the second half of 2012, the full impact of political indecision in the face of the eurozone crisis clearly was being felt by producers located in Europe and those with subsidiaries there.

The US economy continued to struggle through 2012.

Slower China growth was recognised early on and would prove to be a critical factor in the 2012 financial outcome for many firms.

Industry CEOs described 2012 thus:

"The world continued its rocky recovery in 2012, with volatility and uncertainty proving to be the new normal," Dow Chemical's Andrew Liveris told shareholders in the firm's annual report. "Persistent weakness in Europe was a continued drag on global GDP growth, while dramatic declines in China, Brazil and other emerging geographies introduced new risks to a sustained recovery," he added.

BASF's CEO and executive board chairman, Kurt Bock said that 2012 had been a mixed year for the chemicals industry generally. "Growth in worldwide chemical production (excluding pharmaceuticals) slowed from 3.8% in 2011 to 2.6%. The emerging markets of Asia showed markedly weak growth in the first half of the year. The upswing in demand expected for the second half of the year failed to materialise." Oil prices had remained high and it had not been possible to increase chemicals sales volumes.

BASF said that the slump in chemicals production growth last year was the result of weak growth in Asia's emerging markets in the first half. An upturn was expected in the second six months of the year, but deep uncertainty persisted and it did not materialise.

Petrochemical markets in Europe and Asia had continued to be subdued with industry sentiment remaining cautious, INEOS said of the 2012 fourth quarter. By contrast, business in North America had been strong with the continuing benefit of its current feedstock advantage, it said.

In petrochemicals and polymers particularly but also in certain other product lines, the ethane cost advantage in North America, driven by increased production of shale gas, was a feature of 2012. That feedstock advantage is driving a new wave of cracker investment in the region while companies are also planning investments in ammonia, methanol and other gas based processes.

Commenting on the performance of its highly integrated (upstream and downstream) chemical business, oil giant ExxonMobil said that worldwide chemical demand had been relatively flat in 2012.

However, ExxonMobil is optimistic about future growth for its petrochemical intermediates, plastics and specialty chemical operations.

"We anticipate this to strengthen over time, linked to the growth of the broader economy," it said.

"Asia Pacific has accounted for more than two-thirds of global demand growth since 2000, and we expect this trend to continue. Over the next decade, we expect global chemical demand to grow by 50 percent, driven by improving prosperity in developing countries," it added.

That longer term optimism is prompting significant investment in high growth parts of the world.

Chinese players are adding considerable methanol to olefins (MTO) and methanol to propylene (MTP) capacities, for example.

Capacities are increasing also for a range of chemical intermediates that will be needed to continue to fuel China's growing manufacturing economy and to help meet its infrastructure needs even though demand for such products is likely to grow at a slightly reduced rate.

Olefins capacities are also expected to increase in Asia and in the Middle East.

The shift in emphasis from low cost gas feedstock to a broader gas and liquids feedstock slate means that the impact of players from the Middle East will eventually be more widely felt.

Influencing the industry's development in the Americas is the shale gas revolution and the increased usage of low-cost natural gas liquids (NGLs) feedstocks from gas and oil exploration.

Petrochemical producers active in North America have lifted profitability on the back of cheap ethane and propane and significant capacity additions are planned. And producers of ethylene-based plastics have been targeting export markets given still relatively slow-growing domestic demand.

The ICIS Top 100 sales total is 0.8% lower for 2012 compared with 2011 and down 4.0% for the top 10 companies, facts which illustrate the global pressure on growth for the industry. The top 10 together account for 37% of the Top 100 sales total.

Both petrochemical and specialty chemical producers struggled with slower global growth in 2012 and in many instances weaker chemical prices. Once again, however, the industrial gases producers and fertilizer makers bucked the chemicals trend and enjoyed healthier growth and margins.

There are a number of new additions to the top 100 listing including the Australian fertilizer and explosives producer, Incitec Pivot, and the world's largest producer of polystyrene and other styrene-based polymers, newly formed Styrolution.

The sales of Styrolution are not consolidated in the figures shown for either of the joint venture's owners, BASF or INEOS.

The sales numbers used to list chemical companies in the ICIS Top 100 represent unconsolidated sales where possible and under 50:50 joint ventures are accounted for by the equity method. Footnotes explain the placing of companies in the table.

Merger and acquisition (M&A) activity has played a role in moving some players in the Top 100 2012 table.

Specialties group Ecolab, for example, acquired water chemicals maker Nalco at the end of 2011 and has risen in the Top 100 2012 rankings.

Chemicals distributor and chemicals maker Ashland has climbed in the listing following its acquisition of speciality chemicals group ISP.

We report on Spain's CEPSA, which is now wholly owned by the Abu Dhabi state investment fund IPIC. CEPSA acquired polyethylene terephthalate (PET) producer Artenius San Roque in 2011.

Specialty chemicals producer Lonza acquired Arch Chemicals of the US in 2011 and has risen in the ICIS Top 100 rankings for full year 2012.

Thailand's Indorama saw the acquisition of polypropylene (PP) and PET based hygiene products maker FiberVisions in early 2012 as something of a coup. The company also integrated vertically with the acquisition of US ethylene oxide (EO) and monoethylene glycol (MEG) producer, Old World Industries.


METHODOLOGY
In the ICIS Top 100 ranking of the leading chemical companies, ICIS lists the major producers globally by sales and collates a substantial amount of financial information for the sector.

The Top 100 table published here is based on performance in the most recent financial year, which for most companies was calendar 2012. The data shown are collected from public, private and state-controlled chemical companies including the chemicals operations of the major oil companies, industrial gases and fertilizer producers.

The aim is to present an as comprehensive picture as possible of major sector companies, to illustrate trends in profitability as well as top line performance. Group figures are collected for most producers to achieve a comprehensive data set and the additional financial information collected by ICIS for its Top 100 analysis is available on request.

The data illustrate profits as well as sales growth across the sector, debt levels, capital and research and development (R&D) spending and, where available, other measures. In our analytics feature (see page 36) we look at some of the trends in sales growth and profitability that the numbers reveal.


A MESSAGE FROM OUR SPONSOR

The Valence Group is pleased to be the sponsor for the ICIS Top 100 Chemical Companies.

The Valence Group is the only global M&A adviser focused exclusively on the chemicals and related materials industries. We are the most active chemicals M&A firm in the world, having advised on 30 closed M&A transactions worth approximately $10bn since our formation in 2008. Our offices in New York, London and Shanghai have acted as M&A adviser to many leading companies in the chemicals sector, including Arkema, Cytec, DSM, Eastman, ExxonMobil, INEOS, PolyOne, Solutia, Solvay and Tessenderlo.

Our overarching belief is that the $2.5tr chemicals industry - with its multiple product and application sub-sectors, each with their own complexities and dynamics - requires an investment bank with in-depth specialist knowledge and expertise. Consequently, our team combines experienced investment bankers, industry and strategy consultants and former senior executives from the chemicals industry. This equates to a collective experience of more than 350 years in chemicals M&A, covering more than 80 chemicals sub-sectors in both public and private transactions. This level of depth gives us an unparalleled understanding of chemicals M&A. Furthermore, we are conflict-free, as we are solely dedicated to providing M&A advisory services.

We also strive to produce a level of analysis of the chemicals sector that is both informative and valuable to our clients. We created the Valence Indices to track share price evolution in 33 chemicals sub-sectors in order to more accurately represent performance and trends on a sub-sector, rather than an industry-wide basis.

Additionally, we regularly publish in-depth analysis of valuation drivers, profitability dynamics, sector share price correlations, regional M&A trends and sector revenue maps for the industry.

In the last 10 years, global chemicals M&A activity has continued to increase, despite recent economic downturns. Therefore, although already having the broadest insight and senior-level contacts in the industry, we are committed to serving our global client base further, and will be expanding our team and office network further in 2013/2014.

www.valencegroup.com


Download the pdf of the ICIS Top 100 Chemical Companies


By: Nigel Davis
+44 20 8652 3214



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