Chemical Companies

Finding the Right Formula

chemical industry-dirk bannert-evonik
Big deals are in the pipeline.
  • Why it matters

    Why it matters

    Profit margins across the industry are under pressure, due largely to declining oil prices.

  • Facts

    Facts

    • Essen-based Evonik has been eying large purchases for a while.
    • BASF is the largest chemicals producer worldwide and headquartered in Ludwigshafen.
    • The weak euro could increase chemical companies’ operating profits by up to 10 percent.
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    Audio

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Big merger deals and acquisitions will drive the chemical industry in 2015, pushed by low-cost financing and pressure for high-value specialty products, experts say.

German chemical giants Evonik and BASF are expected to be among the top players, vying with U.S. and Asian firms.

“We are well-prepared for big deals,” said Evonik chief executive Klaus Engel.

Last year, the pharmaceutical and life-science sector created most of the buzz in mergers and acquistions. For example, Actavis bought Allergan, and Merck caued a sensation with its planned takeover of the laboratory supplier Sigma-Aldrich.

The traditional chemistry industry, by contrast, plodded along 2014, with a stagnating volume of big deals, done mostly by American and Asian competitors.

Evonik lacks a persuasive growth story to stimulate what has been a disappointing share price.

Industry analysts expect more activitiy in Europe this year.

“The time for larger deals is ripe,” wrote the authors of a study by Helvea Baader Bank.

Volker Fitzner with the consulting firm Pricewaterhouse-Coopers agrees. “In 2014, European chemical companies held back on acquisitions,” he said  “A higher level is expected for 2015.”

Several factors are at work.

First of all, chemical companies in Europe need to restructure their product lines; some of their “specialty” products have proved to be merely “standard” and have come under intensive competitive pressure from Asian suppliers. The producers now hope to cast off their profit-poor divisions and acquire firms with high-value product segments.

Second, demand for chemical products did not grow as expected in 2014 – a situatin that will likely continue in 2015. Achieving growth through acquisitions should have a higher priority, according to a report by Citigroup.

018 Evonik-01 (3)

Finally, the financial structure of most companies improved in 2014, and financing costs continued to decline. Private equity firms could also become more active this year.

Industry insiders say Essen-based Evonik will be under strong pressure to grow through acquisitions. The company, which produces Plexiglas, dietary supplements and special plastics, has an almost debt-free balance sheet after exiting the energy and real-estate business.

According to company insiders, Evonik has already sounded out merger possibilities with the Dutch chemical company DSM.

“Everyone wants to consolidate,” said one industry source, “but no one wants to be consolidated.”

BASF, the world’s largest chemical producer, is also expected to be on the prowl in 2015. In recent years, the Ludwigshafen-based company has limited itself to deals for smaller, technology-oriented companies.

At a first glance, the parallel decline in the euro and the price of oil would seem to be a boon for German companies.

The company’s chief executive officer, Kurt Bock, is rumored to be considering deals for Croda and Symrise, among others. And he also has his sights set on the United States.

At the same time, Asia and U.S. rivals are looking at Europe.

American chemical company DuPont is said to be interested in DSM and Syngenta. And Houston-based Lyondelbasell and the Saudi firm Sabic are viewed as possible partners or buyers of Lanxess, the German specialty chemical group.

The robust outlook for mergers and acquistions in the chemical industry will likely be balanced by continued pressure on profits in 2015 – despite positive effects from exchange rates and declining costs for raw materials.

At a first glance, the parallel decline in the euro and the price of oil would seem to be a boon for German companies, especially in fierce competition with North America.

BASF WTB

If the euro remains weak, the currency-rate effect from 2014 should increase operating profits by at least 5 to 10 percent. BASF, for example, calculates that every cent the dollar increases in value will bring around €50 million additional earnings before interest and tax.

In principle, cutting the price of oil by half significantly eases the cost of raw materials.

But experts say it’s not that simple. Weak oil prices are an indirect sign of a dampened world economy, implying that the global chemical market will only grow moderately, after several years of strong expansion.

In addition, the price for many oil-based chemical products will sink along with oil. As a rule, this causes many customers — in expectation of further price drops— to postpone new orders and use up their stocks instead. Destocking will increase over the short term, warned the head of Lanxess, Matthias Zachert.

Declining prices could also force many chemical companies to depreciate expensively purchased supplies, which in the first half-year could lead to a further dampening of profits.

There are other effects, too. For instance, BASF, which is strongly involved in the oil business, must reckon with a decline in profits of around €800 million ($926 million) based on current oil prices. This means that the positive effect from a surging dollar will more or less be eaten up by losses in the oil and gas business.

 

Siegfried Hofmann covers the chemical and pharmaceutical industries. To contact the author: hofmann@handelsblatt.com.

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