December 2010 Archives

Contrarian minds might think it's nigh time to sell the chemical group when the term "supercycle" enters the investment lexicon. But dare I say it? This time it's different!

Robust petrochemical and polymer margins and talk of a "stronger-for-longer" upcycle are typically late-cycle phenomena. Such forecasts came out in full force in early 2005 - after about two years of recovery off the bottom of 2002-2003.

Of course, that upcycle never came. In terms of stock prices, early 2005 marked the peak for many commodity chemical companies.

US-based Dow Chemical closed at over $55 and US chemical major Huntsman went public and hit a high of $28.50. Both have not seen those levels since, although Huntsman came close after a planned buyout by US private equity firm Apollo Management in July 2007 that later went awry. As of late December 2010, Dow and Huntsman traded at under $35 and $16, respectively.

One Wall Street analyst noted that Netherlands-based chemical giant LyondellBasell's investor day in New York drew over 200 attendees - the most ever for a chemical company.

That gave him, as well as at least one buy-side analyst, pause as this could be a sign of a bubble. But this time, it is still early days.

For our last issue of 2010, December 13, we are pleased to unveil the ICIS Top 40 Power Players - the most influential people in the global chemical markets.

In a year of recovery, the rising tide has lifted many boats out of the maelstrom of 2009, but some firms will emerge stronger than others. During the darkest times of the financial and economic crisis of 2008-2009, a select group of leaders positioned their organizations for success and are reaping the rewards.

Many chemical companies and groups have emerged from the downturn in a stronger position than ever before, owing to the hard work of their people and the vision and courage of their leaders.

One such emerging success story is that of Netherlands-based chemical major LyondellBasell Industries. The company, led by CEO Jim Gallogly, held its first investor day in New York on December 8, just months after emerging from US Chapter 11 bankruptcy in April and listing on the New York Stock Exchange in October.

In May 2009, while the company was in bankruptcy, as the new CEO, Gallogly addressed his 17,000 employees in a broadcast.

"Our goal is not to have this company emerge from Chapter 11. Our goal is to take a Chapter 11 company and turn it into the absolute top performer in the chemical industry - make history," said Gallogly at the investor day, recalling his speech.

It was not an easy target for a company with over $20bn (€15.13bn) in debt, a history of poorly-timed acquisitions and a patchy operational record, he acknowledged.

"Many people laughed at the time, but today this is a possibility," he said.

Today, the "new" LyondellBasell has net debt of just $2.5bn, but tremendous leverage to the upcycle. Fixed cash costs have been cut by $1bn, as the firm shut down 4bn lb (1.8m tonnes) of high-cost chemical capacity. Its US crackers are also benefiting from the shale gas cost advantage.

LyondellBasell anticipates peak petrochemical profit conditions in three to four years, with global ethylene capacity additions in 2010 to be absorbed in 2011 and 2012, and few capacity additions beyond 2011.

Headed by Gallogly and his new team, it has a better-than-good chance of success.

Photo credit: opshori.wordpress.com

One of the historic ICIS Top 40 Power Players, Joe Acker, former president of the Society of Chemical Manufacturers & Affiliates (SOCMA), passed away on December 6, 2010.

Joe died on the night of the SOCMA's 89th Annual Dinner in New York, following a courageous battle against pancreatic cancer.

He retired from SOCMA last December, after 16 years of service to the US trade organization, where he raised its profile in Washington, D.C., grew membership and encouraged members to be more active in lobbying.

We are very fortunate to have met and worked with Joe over the years. He has always been gracious and generous with his thoughts and words.

Last December, he said: "Our industry must embrace the changes ahead with optimism, continue reaching out to the decision-makers in Washington and commit to working with them, while also being true to the ideals that define our industry: ingenuity, innovation and integrity."

Joe fought hard to further and protect the interests of small and medium-sized batch chemical businesses.

On December 7, US President Barack Obama announced a deal with the Republicans that would extend tax breaks, including tax credits for small businesses that hire new workers.

Joe would have approved.

Photo credit: SOCMA

Get ready to see more private equity firms selling chemical assets to other private equity firms to other private equity firms. These so-called sponsor-to-sponsor deals will become more prevalent based on several factors.

First, many financial buyers are seeking to exit investments made during the private equity boom in the 2000s through 2008. The typical holding period is 3-5 years, and many are getting long in the tooth.

Second, private equity firms also have plenty of cash to spend in their more recently raised funds. This money needs to be put to work. Third, strategic buyers are being selective, typically buying only those assets that fit within their current portfolios - often financial buyers are the only ones interested.

Lastly, the overall high-yield financing market remains robust.

Last week saw US-based Royal Adhesives & Sealants sold by Quad-C Management to Arsenal Capital Partners. Other sponsor-to-sponsor deals this year involve US-based companies Arizona Chemical and Univar.

More of these deals will surely come. But an interesting question is: How will one sponsor create value from an asset already owned and cost-optimized for years by another? The answer is likely a combination of leverage and roll-up opportunities.

Photo credit: www.dond.co.uk