By John Richardson
Reasons for this include the fact that private investors are of course always seeking to make money from any crisis. Why not buy perfectly good assets for just a few cents on each dollar of debt of their true long term worth?
State-owned investors have different motives. They see the opportunity in a crisis to broaden and strengthen their domestic economies through gaining control of technologies and expertise that would not be for sale at all, at any price, in other circumstances. This can make them willing to pay more than the private investors.
Major ownership changes might have occurred last time around – at the height of the 2008-2009 “inventory crisis”.
At that point, some Western commodity chemicals and polymers companies were sitting on major naphtha and other raw materials losses following the sudden collapse in oil prices. The naphtha in their tanks was instantly worth a great deal less than the prices they would have been able to get for their polymers etc., and so their banks were not happy.
But in the end, many of the ownership changes that were said to be under discussion didn’t happen. Why? Because central bankers and governments pumped unprecedented volumes of economic stimulus into the world economy.
This stimulus quickly corrected oil prices, and as oil prices and other commodity prices rose, the illusion was created that after all the fuss, there was nothing wrong with the global economy. The illusion was centred on China and the growth of its middle class.
Now, though, we are in a very different world. Sure, central bankers are not going to suddenly give up on stimulus. They will try again and again, like the alchemists, to in effect turn base metals into gold – to print babies. But this of course cannot work, and so can only deliver very short and unsustainable fixes to the global economy.
This means that private investors, and their state-owned counterparts, will have more time to ponder acquisitions.
How will this play out? This is just my preliminary thoughts, and there are sure to be many more scenarios.
China needs to, simply has to, escape its “middle income trap”. So it will want higher value chemicals and polymers to bridge its technology and expertise gap. This will enable it to say build smartphones from scratch – with everything, from all the basic raw materials to the final finished product, made by local companies.
It also needs to clean up its environment. Chinese companies might, for example, be therefore already searching for the chemical technologies and services that can improve air quality.
Moving upstream – back to the basic chemicals and polymers I discussed earlier on – many of the older plants in the West are fully depreciated and so have no debts. They are also the bedrock of local companies as they have created many downstream jobs.
Equally, what would happen to associated refinery assets if these plant shut down? Local economies need local supplies of transportation fuels.
Here is thus an opportunity for both private and state-owned investors to work with local governments to acquire these assets and so keep them running – assuming, of course, that their current publicly-owned owners decide to make the divestments in the first place.
Why might public companies decide to sell these and other assets? Because of the tyranny of quarterly results, where you have to constantly demonstrate improvements, just about every single quarter, to keep your investors happy. This is going to be exceptionally difficult in today’s economic climate without significant divestments.
Who really knows, though? The corporate landscape might remain almost entirely unchanged.
But what I do know is that this will only happen if the current owners of chemicals assets become demand, rather than just supply, focused.
You simply must manage your own demand to be successful, as the days of the purely supply-driven business model of “build it and they will come” are over for good.