Commentary: A very eventful year

Goodbye 2015 – an eventful year as any! For the industry it had everything, from plunging crude oil and commodity chemical prices, to the China slowdown, to US new project construction, renewed investor activism, a nuclear deal with Iran, quantitative easing in the eurozone and a contrasting interest rate hike in the US. A solid year for mergers and acquisitions (M&A) was capped by the announcement of the “deal of three centuries” (thank you, Frank Mitsch of Wells Fargo) – the $130bn (€120bn) mega merger between Dow Chemical and DuPont.

Many of these trends and events, along with their consequences, will stretch into 2016 and should make it as interesting a year as 2015.

What more can one say about the planned Dow/DuPont merger? There are obvious cost synergies, and the companies have identified them to the tune of $3bn-4bn in cost savings within the first two years of closing, which is expected in the second half of 2015, and $1bn in potential revenue growth from the combination. Wall Street points out that these are conservative estimates with the actual cost savings likely to come in higher.

Ultimately, the plan is to break the merged entity up into three leaner and more focused companies – a $51bn commodity chemical and materials company back integrated into crackers, a $19bn agricultural chemicals and seed trait business that can better compete with leader Monsanto, and a $13bn specialty chemicals company focused on electronic chemicals, nutrition and industrial biosciences.

Dow and DuPont suppliers and customers are weighing the implications of the merger and split. Bankers are weighing the hefty fees. To read more insight on the deal, see page 10.

Not as much a surprise as the Dow DuPont deal was the quarter-point interest rate hike by the US Federal Reserve on 16 December. Widely anticipated and signalled by the central bank for months, the increase ends years of easing monetary policy since the financial crisis started in 2008. The US stock market, including chemical equities, took the move in its stride, rising on the dovish tone of Fed chief Janet Yellen, who said a return to a normalised rate environment would be “gradual”.

However, less than a week earlier there was a hiccup in the high-yield debt markets, with one major fund freezing redemptions, and news of the move causing waves of selling of high-yield bonds. That market is worth watching in 2016 – not just in the US, where the collapse in oil prices is hitting leveraged shale oil and gas operators hard, but in emerging markets, where companies have built up piles of dollar-denominated debt through the years of loose US monetary policy.

The dollar is also worth watching, as this has been a major headwind for profitability among US manufacturers with international exposure, including chemical companies. The US dollar index is up by about 22% over the past two years and further strength could be problematic.

Meanwhile, the European Central Bank is continuing its ultra-easing, juicing the region’s economies and making industries more competitive as the euro falls. Manufacturing activity, as measured by the manufacturing purchasing managers’ indexes (PMIs) has held up the best in the eurozone versus the US and China.

As for China, can it continue to engineer a semi-soft landing as it transitions from a manufacturing export powerhouse to a consumer-driven economy? The great rebalancing has already begun.

Meanwhile, Asia – China in particular – is the prime destination for US plastic resins exports as the wave of new petrochemical and polyolefins capacity starts up in 2017-2018. Kevin Swift and Martha Moore, economists at the American Chemistry Council (ACC) estimate that around half of the new US plastics resins capacity will be exported.

To our longtime and new readers, we wish you all Happy Holidays and a very Happy New Year!