INSIGHT: Chemicals M&A doldrums may last through 2024

HOUSTON (ICIS)–High borrowing costs and an industry in recession could continue to dampen chemical industry mergers and acquisitions (M&A) through the first half of 2024 and even through the US election in the second half of the year, consultants at KPMG said in an interview.

• Data points to a chemical industry in recession, which is suppressing M&A
• Uncertainty about the outcome of the 2024 elections could offset any jolt that M&A markets could receive from lower borrowing costs
• Dealmaking continues, although at a slow pace

CHEMICALS RECESSION DAMPENS M&A
Chemical companies are reluctant to make acquisitions because the industry is in a recession, said Gillian Morris, head of advisory for chemicals at KPMG US. “All the data that we have points to a current recession in the chemicals sector.”

Chemical volumes have fallen year on year for the past three quarters, she said. Pricing for most chemical groups have fallen year on year for the past two quarters. The most recent earnings season was challenging.

The common theme that KPMG is hearing from the chemical industry is that activity has fallen across most segments, the consultancy said in a research report.

Mike Harling, head of deal advisory & strategy for energy and chemicals at KPMG US, pointed to the US housing market, an important end market for polyvinyl chloride (PVC) and many other plastics and chemicals.

In October, US housing starts reached 1,372 units on a seasonally adjusted annual rate, according to the US Census Bureau. While this was the third consecutive monthly increase, it is down year on year, and it is well below the post-pandemic high of 1,803 reached in April 2022.

Other statistics support KPMG’s call.

In November, the US manufacturing purchasing managers index (PMI) entered its 13th month of contraction. The chemical industry registered its 15th month of contraction.

Throughout the year, executives from companies such as Huntsman said the latest bout of destocking was the worst ever.

RPM’s CEO said near the start of 2023 that the US manufacturing sector was in a recession.

LOWER BORROWING COSTS OFFSET BY ELECTION UNCERTAINTY
It is growing likely that the Federal Reserve will cease raising interest rates because inflation is showing signs of cooling off.

Some economists expect the central bank will begin lowering rates in 2024.

Falling interest rates will lower the cost of debt, the other main factor that has depressed the chemical industry M&A market.

Any relief from cheaper debt could be offset by uncertainty surrounding the 2024 elections.

If US President Joe Biden is replaced, the next administration could introduce new policies and regulations through the federal agencies. Majorities could change in the nation’s legislative chambers.

THE SHAPE OF THE RECOVERY
In 2024, KPMG expects US GDP to grow by less than 2% for the first three quarters of the year. The economy will barely grow above 2% in the last quarter of 2024.

By 2025, the chemical industry could snap out of its recession, and the recovery in the chemical industry and clarity on government policy should resuscitate M&A, Morris said.

When chemical M&A does recover, there could be a lot of businesses up for sale, Morris said.

Among private-equity buyers, they are going to be picky about which targets they pursue, she said. They will want the sellers to clearly articulate how their businesses will create value once they change hands. Otherwise, private equity will move on to the next business for sale.

For corporations, they may need to bolster their buy-side departments after spending so much time focusing on divestments, Morris said.

SNAPSHOT OF CURRENT M&A MARKET
Among the deals that are taking place, many are from private-equity firms selling business in funds that are reaching the end of their lives, Morris said.

Some corporations need to delever. These companies are selling businesses so they can bring their debt loads closer in line with their earnings.

Other corporations are preparing large businesses for divestment in preparation for the inevitable recovery in the M&A market, Morris said.

The following chart shows the volume and value of announced deals.

Source: KPMG

Insight by Al Greenwood

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