Special report: Changing fortunes

The focus of investment for Germany’s chemicals producers is shifting. Cash is still flowing into new capacity, research and infrastructure, but trade body VCI notes that investments in Germany’s chemicals sector for 2012 remained stagnant compared with 2011 at €6.3bn. Foreign investment by domestic companies increased by 25% to €7.7bn.

The first time in years that foreign investment has exceeded domestic spending, 2012 saw investment in local capacity expansion stalling almost €1bn below the peaks of 2008.

Rex Features Deals are being done despite the doldrums

The key beneficiary of that outflow of capital was the US, which saw a 54% year-on-year rise in investment to €3.2bn, 41% of total external investments, as German players leverage their existing footholds in the country to capitalize on cheaper energy costs as a result of the shale ethane boom.

Asia and Latin America have also been strong focuses for producers seeking to balance sales more evenly across the regions.

BASF chief Kurt Bock warned the chemicals major’s investments in Germany in 2014 would comprise around 25% of total capital expenditure, down from a third for the previous five years.

SIGNIFICANT SPENDING

“Germany is becoming less attractive as a chemical industry location. Investments increasingly go to regions outside Europe,” VCI said in a 2013 report. “The demand for chemicals is stagnating in Europe, and the growth forecasts are cautious for the coming years.”

However, the chemicals sector is the third-largest industry in the country, and significant capital investment continues to flow into the country from home producers and international companies with operations in the country.

One of the most significant investments in Germany’s chemicals infrastructure in recent months was the completion of the Ethylene Pipeline Sud, a €220m, 370km ethylene pipeline running between Munchsmunster, Bavaria, and Ludwigshafen, Rhineland-Palatinate.

Stakeholders in the project include BASF, LyondellBasell, Borealis, Clariant, OMV Deutschland, Vinnolit and Wacker Chemie.

A company with its roots in the German chemicals sector also became the subject of the largest M&A deal in 2013, when oxo-alcohols specialist Oxea was acquired by Oman Oil Company (OOC) for $2.4bn from private equity firm Advent International, with an eye to diversifying the sultanate’s chemicals industry.

DIVESTMENT DRIVE

The fact that a $2.4bn deal represented the high watermark for chemicals M&A in 2013 illustrates that, although dealflow remained resilient year on year in 2013, the aggregate value of deals declined substantially.

A move to focus on core strengths offers a buyer’s market for high-quality assets judged in the harsh economics of survival to be non-core, along with fire sales and rescue deals for the assets of insolvent businesses, such as the acquisition of distributor Kruse by rival Stockmeier at the start of 2013.

Divestments have generated a substantial amount of German chemicals sector investment, including INEOS’ acquisition of Sasol’s German solvents business, and is likely to continue to drive it.

Dow announced plans in March 2014 to carve out parts of its chlorine and epoxies businesses, including three sites in Germany, and several German facilities have been included in Solvay and INEOS’ laundry list of assets they are prepared to dispose of to get their proposed polyvinyl chloride (PVC) operations merger greenlit by European regulators.

Bolt-on acquisitions to strengthen company footholds in specialist fields have also driven investment in the country, due to Germany’s strong tradition of research and development and the pursuit of higher-margin products.

Bayer acquired microbial crop science company Prophyta, while fellow chemicals major Wacker Chemie agreed to buy a bioengineered pharma proteins production site and associated business from BioNet Ventures. Bunge received clearance to proceed with the acquisition of joint-venture partner Diester 
Industrie’s shares in biodiesel operations in the country.

There have still been a number of closures announced, mostly of bulk and upstream chemicals as a result of margin pressure from lower-cost regions, a trend that seems unlikely to reverse in light of Europe’s diminishing competitiveness for bulk chemicals and precursors.