How will energy costs influence the market for chemical commodities and downstream products? What will be the impact on chemical and pharmaceutical manufacturing? DCAT Value Chain Insights (VCI) examines the near- and long-term outlook.
The performance of the global chemical industry is important to sourcing and procurement executives and suppliers alike in navigating the market for chemical commodities and downstream products. Energy costs play a major role in determining the competitiveness of the chemical industry, supply-demand fundamentals on a product basis,and the production economics for chemical and pharmaceutical manufacturing. DCAT Value Chain Insights (VCI)analyzes the energy and economic impacts on chemical supply-demand fundamentals from a US and global perspective and the impact on the pharmaceutical manufacturing value chain.
Impact on shale feedstocks on US chemical exports
In the United States, the increase in shale gas could lead to dramatic growth in US chemical exports over the next 15 years, according to a recent analysis from Nexant, Inc., and sponsored by the American Chemistry Council (ACC), a US-based industry association representing chemical manufacturers. Gross exports from the US of chemical products, including plastics, linked to more plentiful and cost-effective natural gas, are projected to double, from $60 billion in 2014 to $123 billion by 2030. The US trade surplus for select chemicals is projected to increase from $19.5 billion to $48.3 billion over the same period, with China, Mexico, and other Americas remaining the leading net export destinations.
The analysis, “Fueling Export Growth: US Net Export Trade Forecast for Key Chemistries to 2030,” provides estimates of annual US net trade volumes for 66 chemicals derived from unconventional oil, natural gas and gas liquids; their expected destinations (countries and/or regions); and their potential trade value. ACC and Nexant focused on the trade outlook for products that are expected to see the greatest trade increases as a result of US chemical production gains from 2010 to 2030. While energy markets are dynamic, the conclusions of the report point to a long-term competitive advantage for US manufacturers on shale gas-advantaged chemicals. Chemical companies have begun or are planning 223 shale-related projects to date, including eight announced in December 2014, representing a cumulative investment of $137 billion. Fully 60% of these projects are foreign direct investment, according to the analysis.
The net US exports of plastics are expected to increase to more than $21 billion in the next 15 years Within the US, gross exports of chemicals could double from $60 billion in 2014 to $123 billion while net exports are projected to grow from $19.5 billion in 2014 to $48 billion in 2030. On a commodity basis, the biggest driver of the improving US trade surplus will be plastics (reaching $21.5 billion of net exports by 2030, an increase of $15 billion) and specialties (reaching $20.5 billion, an increase of $9.3 billion), with moderate growth in intermediates (reaching $9.15 billion, an increase of $3.1 billion). Regionally, chemicals and plastics will see a significant rise in exports from the US to destinations, such as China (reaching $11.7 billion by 2030, an increase of $8.7 billion); other Americas (reaching $10.9 billion, an increase of $8.6 billion); Mexico (reaching $13.8 billion, an increase of $5.4 billion); and Europe (reaching $5.4 billion, an increase of $2.6 billion).
The data includes estimates of annual US net trade volumes over the forecast period for 66 chemicals at the commodity and category levels, including: plastic resins, petrochemicals, intermediates, inorganics, and specialties. The data also indicates the potential value of trade movements from the U.S. to countries and/or regions around the world, including: the Americas (Canada, Mexico, Brazil and others), Europe, Asia (China, India and others) and more distant trading partners, such as the Middle East, Africa and Oceania. This data suggest potential new market access priorities for future US trade policy.
Energy pricing's influence on chemical M&A and other factors
In the near-term, energy pricing is expected to increase the level of mergers and acquisitions (M&A) activity in North America, according to a recent analysis by A.T. Kearney.The firm projects that the sharp drop in oil prices from Brent’s $115 high in late June 2014 to a significantly lower level of $50-60 is expected to have a ripple effect on petrochemicals players. “With the current low oil price, we expect oil companies to put chemical assets on the market to generate cash," said Joachim von Hoyningen-Huene, a partner at A.T. Kearney and co-author a recent report on chemical M&A. "This will create opportunities for chemicals companies interested in the oil industry to buy suitable assets for more reasonable multiples.”
Overall, the global chemicals industry is expected to witness an increased number of M&A in 2015, according to an A.T. Kearney survey of chemical executives as activist investors are likely to drive the increase in deals byputting pressure on chemical majors to divest assets seen as underperforming. Especially in North America, activist investors have pushed for portfolio restructuring of large chemical companies with diversified portfolios such as Dow Chemical and DuPont.
“Activist investors are putting pressure on the management of some of the most prominent chemical majors to streamline their business portfolio. So far this trend is most predominant in North America, but as a consequence of increasing fund sizes and a scarcity of underperforming assets in North America, we expect shareholder activism to also grow in Europe and Asia,” said von Hoyningen-Huene. Since 2013, deal value of M&As has increased by 13%. Sixty percent of chemicals executives surveyed by A.T. Kearney see 2015 as a year of increased M&A.
In the US, a key deal is the pending closing of the $6.9-billion acquisition of Rockwood Chemical by Albemarle. In Europe, chemicals deals will be depressed in the short tem by the current economic climate and political tensions with Russia, according to the analysis.Thomas Rings, partner at A.T, Kearney and co-author of the chemicals M&A report, said: "North America is projected to represent the main share of chemicals mergers and acquisitions in 2015. However, China will be the strongest growing region for chemicals M&A activity in 2015 with expected further consolidation of the local market as well as an increase in geographic expansion and inbound international investments in the critical Chinese market.” In the foreseeable future, strategic investors are expected to continue to drive M&A in the chemicals industry. The financial factors that will drive M&A in 2015 are healthy balance sheets of chemical companies, limited returns on organic investment opportunities, and continued good access to financing. Strategic key reasons for growing M&A momentum are portfolio streamlining (also driven by activist investors), Western chemical companies seeking access to faster growing emerging economies and vice versa, the resurgence of the chemical industry in the US due to low-cost feedstocks, and the continued high level of fragmentation of chemical markets in Asia.
In projecting chemical M&A activity in 2015, a recent analysis by Deloitte says that global chemical M&A activity is expected to increase further in 2015, building on a strong year of activity in 2014 that saw 635 M&A transactions with an aggregate value of $77.8 billion. According to the Deloitte Touche Tohmatsu Limited (Deloitte Global) Manufacturing Industry group’s 2015 Global Chemical Industry Mergers and Acquisitions Outlook, companies are continuing to realign portfolios and pursue profitable inorganic growth opportunities. In addition, M&A interest is likely to be fueled by stronger corporate balance sheets, liquid debt markets, and continued favorable interest rates.
During 2015, key chemical segments of commodities, intermediates and specialties, fertilizers and agriculture chemicals, and industrial gases are all likely to experience continued growth in M&A activity. “While the increase in deal activity is expected to be broad based, the most robust M&A growth in 2015 is anticipated in the fertilizer and agricultural chemical segment. Companies in this segment are focused on acquiring new innovative technologies and supplementing current portfolios to deliver more holistic solutions to the market,” said Dan Schweller, Deloitte Global Manufacturing M&A Leader, in commenting on the study.
In the Americas region, the continued economic growth in the United States, is expected to help facilitate more transactions in 2015. Additionally, low feedstock and energy costs in the U.S. are likely to attract foreign buyers although the appreciation of the US dollar could impact affordability to foreign buyers. Also, lower global oil prices could alter the feedstock advantage enjoyed by US-based assets. Within Europe, the UK and Germany saw smaller and medium sized transactions in 2014, and that trend will continue in 2015. In Germany, some of the more significant market players have implemented new organizational structures which are expected to drive M&A activity in 2015. In the UK, one of the few economic bright-spots in Europe, increased deal activity is expected to be prompted by further economic recovery and greater involvement by both private equity investors, as well as larger private and public companies seeking growth.
In the Asia-Pacific region, China is expected to be very active in the agricultural chemicals segment due to the continued need to increase crop production. Japan will likely see growth in M&A within the fine and life science chemicals segments as companies continue to diversify away from lower margin commoditized chemical products. Meanwhile in India, an increase in chemical M&A activity is anticipated, especially from foreign buyers.