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Outlook 2014: Looking forward
Global growth accelerates
7:42 AM MST | January 13, 2014
Global economic and chemical output growth should continue to accelerate in 2014. “With improving economic prospects, headline growth for chemicals globally will improve to 3.8% in 2014,” says Kevin Swift, ACC chief economist and managing director. That number is up from expected global growth of 2.4% in 2013.
The strongest growth will continue to be in the developing nations of Asia, the Middle East, and Latin America, Swift says. “Due to competitive advantages from shale gas, growth will be strong in North America as well. Western Europe and Japan will lag. With strengthening production volumes, global capacity utilization will improve in the years to come.”
The overall world economy is likely to emerge from its extended soft patch of the last two years thanks to the easing of the twin headwinds of private-sector deleveraging and public-sector austerity, says IHS chief economist Nariman Behravesh. “That said, the global growth rebound is likely to be quite modest,” he adds. “IHS expects 3.3% growth in 2014 compared with 2.5% in 2013.”
The good news is that the upside surprises about growth may more than balance out downside surprises, provided some of the more daunting risks facing the world economy, such as an oil shock, do not materialize.
US chemical makers are firmly “back in the game” thanks to the cost advantage enabled by low-cost shale feedstocks, according to Swift. US chemical production is expected to rise 2.5% in 2014 and 3.5% in 2015, Swift says. “Following a decade of lost competitiveness, American chemistry is reemerging as a growth industry,” Swift says.
US chemicals production will grow strongly through the second half of the decade, as the nearly $100 billion in new chemical investment announced since 2010 comes online. “During the second half of the decade, US chemistry growth is expected to expand at a pace over 4%/year on average, a rate that exceeds that of the overall US economy,” Swift says.
The total value of shipments will advance at a slightly stronger pace than production, with shipments values set to exceed $1 trillion in 2018, up from $789 billion in 2013, ACC says.
The forecast growth rates are the highest for industry in more than 20 years. “Excluding pharmaceuticals, US [chemical] growth has averaged less than 1%/year since the early 1990s,” says Martha Gilchrist Moore, ACC’s senior director/policy analysis and economics. “This is going to be a real step-up from that level.” US chemicals production excluding pharmaceuticals was up 3.2% in 2013, and growth is expected to slow to 2.6% in 2014. Specialties and agricultural chemicals will drag down the rate in 2014 after advancing strongly the two years prior. Basic chemicals are expected to grow 2.4% in 2014, up from 1.2% in 2013. Chemicals production growth excluding pharmaceuticals will be 3.5% in 2015, 3.8% in 2016, and 4.0% in 2019, according to ACC estimates.
US exports will ramp up sharply as production comes online. Exports of chemicals will grow 6.6% in 2014, to $205 billion, and a further 7.6% in 2015. Excluding pharmaceuticals, the surplus in chemicals trade will grow to $67.5 billion by 2018, up from $42.7 billion in 2013, an average of 9.6%/year.
The expansion is also reversing the industry’s falling employment trend. Employment in the chemical industry will have grown by 1.3% in 2013 and continue to expand through 2018, ACC says. This growth contrasts with the continuous decline in industry employment between 1999 and 2011.—ROBERT WESTERVELT
China: Slower but solid growth
The Chinese economy is set to grow 8% in 2014 compared with 7.8% in 2013, according to the IHS. “Our expectation is for China’s economic growth to accelerate slightly in 2014, growing by about 8%, on the basis of steady investment and consumption growth and a marginal improvement in external demand, which has been a source of volatility [in 2013],” says Brian Jackson, economist/China Regional Service at IHS. Export growth will pick up moderately, but housing markets will remain a drag on the economy, IHS says. “Our view is that China’s economic growth will experience a secular downward trend but, on average, will remain above 7% through 2020,” Jackson says.
China’s chemical industry is maturing and entering a phase of slower but solid growth, analysts say. Chemical production in China will increase 8.5% in 2015 compared with 8.8% in 2014 and 8.5% in 2013, ACC says.
Figures released by the China Petroleum and Chemical Industry Federation (CPCIF; Beijing) show that total revenue for the chemical sector in China, which consists of over 25,000 companies, increased 12.3% in the first nine months of 2013 compared with the year-ago period, to 5.81 trillion renminbi ($957 billion), and total profits for the sector increased 11.2% in the period, to Rmb267.54 billion, says Norbert Meyring, partner at KPMG China (Shanghai) and head/chemicals, China and Asia/Pacific at KPMG. Chemical sector revenue will be about Rmb8 trillion, a 12% increase compared with 2012, and profits would increase 11%, to Rmb420 billion, Meyring says.
In 2014, certain sectors of China’s chemical industry are likely to grow more strongly than others, Meyring says. “Sectors such as fine chemicals and specialty chemicals provide plenty of growth opportunity,” Meyring says. “Agrochemicals are anticipated to do well following a slump in 2012, supported by higher consumption of chemical fertilizers. The automotive market in China is expected to continue its growth at a rate of about 5%/year until 2020, benefiting sectors such as lubricants, synthetic rubber, and engineering plastics,” Meyring says. The construction sector’s growth is likely to drop because of reduced infrastructure spending, he adds. “While increasing consumer spending will help absorb some of the growth in polymers capacity, a significant amount of polymers will need to be exported to justify the extended growth in capacity in the segment,” Meyring says.
The new leadership in China has committed to reforms very clearly, and reforms were the focal point of the third plenary session, Meyring says. “The reforms encourage Chinese enterprises to choose a new path of industrialization, enhance their value chains, compete internationally, and create national champions to increase China’s self-sufficiency in chemicals and establish an environment that promotes sustainability. It is aimed to increase outbound and inbound investment[s] by reducing the level of government involvement in decisions as well as administrative procedures, measures which also benefit the global chemical industry with their investments into China by providing enhanced market access,” Meyring says. —DEEPTI RAMESH
Germany: Economy accelerates
The German economy will strengthen in 2014 despite restraints stemming from lingering weakness elsewhere in the Eurozone, according to IHS. GDP growth is estimated to be 0.6% in 2013 but will climb to 1.8% in 2014 and 2015.
“German exports will benefit from a strengthening global economy and waning recessionary pressure in southern Europe as the need for fiscal consolidation lets up,” says Timo Klein, senior economist at IHS. “German domestic demand should pick up as well based on both consumption and investment. Private consumption has been underpinned by ongoing employment growth averaging 1%/year and solid wage increases of roughly 3%, even during the last three difficult years due to the escalating eurozone debt crisis,” Klein says. “Historically low interest rates that will broadly persist during 2014 are discouraging saving and thus helping consumer demand,” Klein adds.
“I think the global economy has passed the trough,” says Karl-Ludwig Kley, president of industry trade association VCI (Frankfurt) and chairman of Merck KGaA (Darmstadt, Germany).
The German chemical industry is “cautiously optimistic” about the start of 2014, VCI says. Most companies expect the chemical business to pick up in the coming months. “There will be an upward development next year for the German chemical industry, but a slow one,” Kley says. “We are expecting an increase in chemical production of 2% for 2014. Chemical prices are likely to drop slightly, by about 0.5%.” VCI says it expects chemical sales to rise to €191 billion ($263 billion), or 1.5%, in 2014. VCI believes there will be a further increase in domestic demand for chemicals. “Very little is going to change in the foreseeable future regarding the German chemical export surplus, which is good news,” Kley says.
The German economy remains highly competitive internationally, enabling it to profit rapidly from any improvement in global demand, as appears to be forthcoming with the improving US economy. The GDP growth forecast of 1.8% in 2014 compares with a figure of only 0.8% in the eurozone as a whole—roughly 0.4% excluding Germany—or 2.5% for the United States, according to IHS.
The expected pickup in German imports due to the robustness of domestic demand will increasingly deliver growth impulses to the remainder of the eurozone, in turn providing better conditions for German exports to those countries, according to Klein.
The eurozone debt crisis is not over, although Germany’s robust structural labor market conditions, benign inflation, and rock-bottom interest rates, along with a relatively weak euro, are helping to bring about a strengthening recovery, IHS says.
IHS forecasts consumer price inflation to be 1.6% in 2014. The current account surplus is forecast to be 6.5% of GDP in 2014. The surplus will narrow in 2014–15 given improving near-term domestic demand prospects, according to IHS. “The reform of energy policy will be very important for Germany’s medium-term growth potential, as failure to contain power costs as the energy mix moves more towards renewables could increasingly become an important burden for the internation competitiveness of the country’s industry,” says Klein. —MICHAEL RAVENSCROFT
Latin America:Pursuing energy sector reforms
The real GDP of Latin America and the Caribbean will expand by 3.4% in 2014, which is higher than the 3% from the end of 2013, according to IHS forecasts. The Economic Commission on Latin American and the Caribbean (Eclac; Santiago) expects a moderately favorable global environment will help boost regional exports in 2014. Private consumption will also continue to grow, although more slowly than recent periods.
Regarding the largest economy in the region, Brazil’s real GDP is expected to increase by 3.1% in 2014 compared with the 2.5% registered last year. The lackluster growth—by Brazil, Russia, India, and China, i.e. BRIC, standards—was supported namely by fiscal stimulus in advance of next October’s general election and spending related to the World Cup and the 2016 Summer Olympics, according to IHS. “The [trade] deficit in the country’s chemical sector has grown quite intensively in recent years, becoming a great concern for both producers and for the government,” says Fátima Giovanna Coviello Ferreira, director/economics and statistics at Abiquim (São Paulo), the country’s chemical industry association.
Brazil’s petrochemical trade deficit reached $32 billion in 2013, according to Abiquim, and is expected to continue growing in 2014. The association says demand for petrochemical products will grow 4–5%, subject to achieving the 3% GDP growth. The country’s feedstock position based on naphtha impacts the competitiveness of the petrochemical sector vis-à-vis North American producers. The impact of the fiscal measures introduced in early 2013 will become more visible this year, as a series of unplanned outages offset benefits during the second half of 2013, Abiquim adds.
“[Key focus areas] include continuing work on the competitiveness of domestic industry—with a long term view of at least 10 years, a more defined policy for the use of natural gas as feedstock, and turning demand growth into investment opportunities,” Ferreira says.
Ahead of Brazil’s and slightly behind the rest of Latin America’s, Mexico’s real GDP will grow by 3.3%, according to IHS. The forecast is significantly above of the 1.3% growth in 2013. The economy slowed abruptly in the first half of last year, principally because of the delayed effects of weak export demand spilling over to the rest of the economy, according to OECD.
However, fiscal policy is expected to be supportive in 2014, with a temporary increase in the budget deficit envisioned. As global conditions improve and government expenditure expands, growth should rebound over the next 12 months and into 2015, OECD says.
In terms of improved energy and feedstock positions, President Enrique Peña Nieto wants to modernize Petróleos Mexicanos (Mexico City) and increase its efficiency, although the possibility of privatizing it has been ruled out. In addition, the government is attempting to introduce greater private investment in areas that are not exclusively reserved for the state, for example through the introduction of a profit-sharing contract, IHS says.
Such changes to the country’s energy sector “would contribute to access to traditional and nontraditional hydrocarbon production technologies, increasing access to more competitively priced raw material for the petrochemical industry,” says José Luis Uriegas, CEO of Idesa (Mexico City). —FRANCINIA PROTTI-ALVAREZ
Canada: Cautious optimism
Canada’s chemical producers had a good 2013 but are cautious about the year ahead. A recent survey by the Chemistry Industry Association of Canada (CIAC) finds member companies in aggregate predicting lower sales and profits. The companies still expect results that are historically strong, however, and the continued growth of capital investment reflects long-term optimism.
Results for 2013 have set a high standard. Sales of industrial chemicals increased 6% year-on-year, to more than $27 billion, CIAC estimates, matching the prerecession record high of 2008. Exports increased 8%, to over $18 billion, and operating profits set an all-time record at $3.5 billion. Capital spending grew by 20%.
In the year ahead, by contrast, CIAC’s members expect overall sales to drop 8%, with most of the decline to occur in the synthetic resins and rubbers market. Reduced production, including output lost to scheduled plant turnarounds, will account for half of the decline, while lower selling prices, the result of lower commodity prices and weaker market conditions, will be responsible for the balance. The companies predict that exports will decline by 5%. Not surprisingly, given their assumptions, these companies expect operating profits to be 4% lower in 2014.
However, employment levels will remain stable, perhaps declining by 1%, the survey respondents say. Moreover, they expect capital investment to increase 28% in 2014, following a 20% jump in 2013. “This bullish outlook reflects positively on the investment climate in Canada and reinforces the notion that companies are taking advantage of attractive investment opportunities in order to strengthen their competitive readiness[es] for the awaited rebound in global markets,” CIAC says.
In December 2013, Nova Chemicals announced plans to begin a $300-million project that will increase the ethylene capacity of its Corunna, ON, cracker by 20% and increase polyethylene capacity at its Moore, ON, facility. In June, Nova began a $980-million project that will add about 1 billion lbs/year of polyethylene capacity at its Joffre, AB, complex. Other major projects include an $850-million propane dehydrogenation facility that Williams is building near Edmonton, AB.
Feedstock availability has been an issue. Canada’s supply of natural gas liquids (NGLs) is closely tied to natural gas exports, which have been hit hard by development of shale gas in the United States. Consumers have adapted by building and adapting pipelines to supply NGLs from those same shale deposits to Canada. Nova’s Corunna cracker, revamped to run light feeds, began running NGLs from the Marcellus shale in Pennsylvania, delivered through the new Genesis Pipeline extension, in December 2013. Nova says that the Vantage pipeline linking its Joffre facility to the Bakken Shale in North Dakota is essentially complete and will begin supplying ethane in the first quarter of 2014.—CLAY BOSWELL
Europe: Chemicals exit recession
European recovery is expected to continue, but at a very sluggish pace. “Despite some signs of weakness, the nascent eurozone recovery will have staying power,” says IHS chief economist Nariman Behravesh. IHS nevertheless predicts that the eurozone will not regain the GDP peak it achieved in the first quarter of 2008, just before the onset of the financial crisis, until early 2016.
IHS forecasts that the eurozone economy will grow overall by 0.8% in 2014. A wide range of factors will support that growth, Behravesh says. They include monetary policy that ease credit conditions, stabilizing labor markets, less emphasis on austerity by EU and national policymakers, improved spending power because of ultralow inflation, structural reforms that boost productivity in the peripheral countries, and more confidence in the ability of eurozone politicians to manage the sovereign debt crisis.
Fallout from the crisis will continue to dent growth in southern Europe during 2014. “Even with these positive trends, some countries, such as Greece, Italy, and Spain, will struggle to achieve positive growth,” Behravesh says. IHS forecasts that Italy’s economy will contract by 0.3% in 2014. France’s economy will grow by 0.5% in 2014, IHS says.
European economies outside the eurozone are likely to fare better. IHS forecasts that the UK economy will grow 2.8% in 2014, benefiting from diminishing consumer price inflation, easing credit conditions, and strengthening export markets in Europe and North America. The emerging countries of Eastern Europe and the Balkans will generate overall GDP growth of 2.9%, IHS says.
The chemical industry in the European Union turned a corner in September 2013, when it achieved monthly output growth of 0.7%. The September reading confirmed growth for the October quarter—the second successive quarter of rising chemical production in the region. This event marked the industry’s exit from a long, painful recession, Cefic says.
Cefic expects the EU chemical industry’s recovery to continue in 2014 but, like the overall economy, at a modest pace. Cefic predicts a return to annual output growth with the sector’s production of chemicals likely to increase 1.5% in 2014. EU chemicals output contracted by 1% in 2013 despite the exit from recession in the third quarter, Cefic says. “The gradual recovery will be founded on stabilization of industrial production in Europe after two years of weakness and a modest rise in exports,” Cefic chief economist Moncef Hadhri says.
In 2014, Europe’s chemical producers will face increasing competition from imports originating in the United States. “The European chemicals sector will face tough competition from US producers benefiting from cheap energy and feedstock,” Hadhri says.
Competition will be most intense in the petrochemical sector, and the future of some of Europe’s petrochemical production plants, based on relatively expensive naphtha feedstock, is under threat, analysts say. The closure of several naphtha crackers was announced in the European Union during 2013. Cefic nevertheless predicts a 2% rise in output by the EU petrochemical sector in 2014. Cefic also says that production of specialty chemicals will grow 2% this year in the European Union and that employment across the entire EU chemical industry will be stagnant.—IAN YOUNG
Mideast: A shift in strategy
The GDP growth of the Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—as well as the wider Mideast region, will decline slightly in 2014, according to IHS. The GCC states will grow 4.2% in 2014 compared with 4.4% last year because of reduced gains in oil GDP, but nonoil GDP growth in the GCC remains robust, says Bryan Plamondon, senior economist/Mideast and North Africa (MENA) at IHS. MENA will grow by 3.6% and the Mideast by 3.4%. Chemical volumes in MENA will grow by 4.8% in 2014 compared with growth of 3.6% in 2013, ACC says.
The GCC’s petrochemicals output last year reached $97.3 billion, growing at 19%/year over the last five years, according to the Gulf Petrochemicals and Chemicals Association (GPCA; Dubai). This growth is the highest posted by any petrochemicals-producing region in the world, GPCA says. The GCC last year earned $52.7 billion in export revenues.
Historically, the Mideast has been the worldwide cost-leader primarily because of its access to favorably priced feedstock. This situation is changing, however. Mideast producers are placing more emphasis on adding value to basic petrochemicals because of a shortage of advantaged feedstocks. Certain major players, notably Sabic, are considering investing in North America to take advantage of inexpensive shale gas and to secure growth. They are also continuing to invest in China, which, together with the wider Asia region, is the logical market for Mideast producers.
Feedstock shortages have also led Mideast governments to increasingly favor subsidiaries or joint ventures of national energy groups for feedstock allocations, leaving independent chemical companies scrambling for raw materials. Consolidation through M&A is one way of addressing feedstock challenges and securing growth. Sipchem (Al Khubar, Saudi Arabia) and Sahara Petrochemicals (Al Jubail) are in merger talks, and analysts expect other Mideast producers to follow the M&A route. The Zamil Group is a shareholder in Sipchem as well as Sahara, which are listed on the Saudi Stock Exchange.
The region is developing new feedstock resources, including shale gas, but these developments are in their infancies. Oman recently announced a major tie-up with BP in gas and acetic acid projects. The Khazzan field is expected to produce 1 billion cubic feet/day of gas and 25,000 bbl/day of gas condensate, equivalent to about one-third of Oman’s total daily domestic gas supply. BP and Oman Oil Co. have signed a memorandum of understanding to develop the world’s first acetic acid plant using BP’s new synthesis gas–to–acetic acid process. The 1-million m.t./year plant is expected to be built at Duqm, Oman, with start-up in 2019.
Major investments underway in the region include the $20-billion Sadara jv between Saudi Aramco and Dow Chemical, now more than 25% complete; a doubling of capacity by Petro Rabigh, a jv between Aramco and Sumitomo Chemical, at Rabigh, Saudi Arabia; Sabic and ExxonMobil Chemical’s rubber and elastomers project at their Kemya jv at Al Jubail; and an investment in polyurethanes by Sabic, which is making an entry into this market.
Qatar is planning to spend about $25 billion by 2020 to expand its chemical and petrochemical industries. Projects include two investments to build olefins and downstream complexes at Ras Laffan.—NATASHA ALPEROWICZ
Japan: Stimilus boost
Japan’s economy and chemical industry, aided by the aggressive stimulus and fiscal policy encouraged by Japanese prime minister Shinzo Abe, should grow in 2014.
Industrial production and chemical output are likely to exceed GDP growth as a weaker yen reduces imports and boosts exports. Japan’s GDP is expected to grow 1.8% in 2014, while industrial production will grow 4.8%, according to IHS. Japan’s chemical production will increase 4% in 2014, according to ACC.
Japan’ economic spirits have lifted as Abe, who returned to office in December 2012, has launched aggressive fiscal and monetary stimuli to reverse nearly 20 years of deflation and flat economic trends. Japan’s central bank, at the urging of Abe, has announced that it will target a 2% inflation rate within two years.
“Yen depreciation is raising import prices, improving international competitiveness, and boosting profits of multinational companies,” says Dan Ryan, IHS director/research, Asia/Pacific. “Future growth will depend on how effectively the new Abe administration implements stimulus programs and reforms in labor and product markets.”—ROBERT WESTERVELT
India: Specialty sector boosts growth
Economic growth is expected to pick up in India during 2014. The country’s GDP growth rate will increase from 4.6% in the fiscal year ending 31 March 2014 to 5.6% in the fiscal year ending 31 March 2015 and 6.5% in the following fiscal year, IHS says.
“The worst may be over for India’s economy, but persistent inflation, a weak investment climate, and political uncertainty ahead of the 2014 election will lead to slow and uneven progress,” says Nariman Behravesh, chief economist at IHS. “Postelection economic reforms and an upturn in capital investment will be essential to restoring India’s growth momentum,” Behravesh says.
The Indian Chemical Council (ICC; Mumbai) and analysts say that demand for chemical products continues to rise in India. “Disposable surplus income is rising in India, and the increasing standard of living leads to growth in consumption of consumer goods, which results in greater demand for chemical products,” says H.S. Karangle, director general at ICC.
“Per capita consumption in India for products such as plastics and paints is still well below the global average. Despite that, the overall demand for chemicals in India will continue to remain strong in 2014,” says Chaitra Narayan, associate director/chemicals, materials, and foods practice at Frost & Sullivan (Bangalore).
“The Indian chemical industry has always grown 1–2% above the overall GDP growth rate in the country. This trend will continue, and the chemical industry in India will grow about 2% above the GDP growth rate in 2014,” Karangle says. India’s chemical industry sales are estimated to reach $115–120 billion in 2014, ICC says.
Exports of chemical products from India grew at a compound annual growth rate of 8–9% during 2008–13, a rate that will continue in the medium term, Narayan says.
Certain sectors of India’s chemical industry are likely to grow strongly in 2014, ICC and analysts say. “Sectors such as agricultural chemicals, specialty chemicals, [and] construction chemicals... are expected to perform well in 2014,” Karangle says.
Growth rates in India for basic organic chemicals, such as acetic acid and formaldehyde, “are expected to follow GDP and grow at a rate of 5–6%. Meanwhile, the specialty chemicals segment is expected to grow at a rate of 11–12%,” Narayan says. “Specialty chemicals and ag chems are likely to grow faster than basic and commodity chemicals.”
Certain specialty chemicals, such as personal-care ingredients, additives, active pharmaceutical ingredients, paints and coatings, construction chemicals, and water chemicals, are likely to grow strongly. “Also, there has been an increase in activities by Indian players in these segments with respect to expansions—both organic and inorganic.” Commodity and bulk chemicals are expected to slow in 2014 because of lower growth in end-user segments, Narayan says.—DEEPTI RAMESH
Asia: Increasing interest in 'Other Asia'
The GDP growth rate for Asia/Pacific will increase from 4.8% in 2013 to 5.4% in 2014, says Nariman Behravesh, chief economist at IHS. “The global environment facing emerging markets will be more growth friendly than it has been in the last three years. US and Chinese growth[s] will be a little stronger, and the eurozone will no longer be a drag on the world economy. This means that emerging-market exports will again become a source of growth,” Behravesh says. “A return to the very rapid growth rates enjoyed in the boom years of the 2000s is unlikely unless the governments in these countries enact more structural reforms that raise productivity, allocate capital more efficiently, and, thereby, boost potential growth,” Behravesh says.
The outlook for the chemical industry in Asia—excluding China, India, and Japan—is positive for 2014, analysts say. “Many of the fundamentals that support chemical industry demand—including GDP growth, urbanization, growing middle classes—continue to move in a positive direction, which can only be beneficial to growth of the chemical industry,” says Paul Harnick, global COO/chemicals and performance technologies at KPMG (Philadelphia). “There has also been a fundamental shift in the way Asean countries are viewed over the last 18 months. When we talk to senior executives of the world’s biggest chemical companies, there is increasing interest in Other Asia. No longer is an Asian growth strategy just about China or India. The challenge for governments in the region is to continue to adopt policies that will engender investment and growth, continue to invest in basic infrastructure, and encourage transparent business practices,” Harnick says.
Strong year-on-year gains in chemicals output growth are expected in Asia/Pacific, ACC says. Overall chemical production in Asia/Pacific will increase 6.5% in 2014, ACC says. Chemical production in Other Asia/Pacific will increase 6.7% in 2014, according to ACC.
Several countries in Asia will be at the forefront of the next wave of emerging-market, chemical industry growth, Harnick says. They include Indonesia, Malaysia, Thailand, the Philippines, and Vietnam—countries with different specific strengths. “Indonesia’s population gives it a massive potential consumer base, while Vietnam is becoming a favored destination for low-cost manufacturing. The one thing they all have in common is strong fundamentals for growth,” Harnick says.
Commodity chemicals are likely to attract more investment in these countries, Harnick says. “The chemical industry in these countries has to learn to walk before it can run, so investment is likely to be focused on the commodity end of the sector and establishing the basic building blocks of the industry,” Harnick says. “However, with increased urbanization and continued middle-class growth, there are also likely to be opportunities in segments such as construction chemicals, consumer chemicals, and personal care. The challenge for the countries in question is to have all of the fundamentals in place, both in terms of the chemical industry supply chain, as well as legal structures and business practices, such that these higher-value chemicals can be manufactured in-country rather than imported from abroad,” Harnick says.—DEEPTI RAMESH
Petrochemicals: Regional issues are key
The outlooks for olefins and aromatics show that regional concerns will shape petrochemical markets in 2014. The influence of shale gas and oil will continue to dominate North America. European producers will continue adapting to a subdued economic environment and to cost pressures. Asian markets will lengthen with China’s growing domestic production.
A slight increase in the cost of natural gas liquids (NGLs) will reduce US ethylene margins below the record level of 2013, but they will remain at least 20 cts/lb through 2015, IHS Chemical projects. Cash costs are expected to move slightly higher in the coming months but will remain too low to exert pressure on prices.
IHS expects propylene to continue tightening in North America. Supply from steam crackers has been reduced by about 30% since 2007, and NGLs will continue to displace naphtha from the feedslate this year. Refinery-propylene production by fluid catalytic crackers (FCCs) will not make up the difference. Falling US gasoline consumption should keep FCC unit growth at a minimum, and growing hydrocracking capacity will compete for FCC feedstocks.
Propylene supply will not improve significantly until late 2015, when new propane dehydrogenation units start up. IHS nevertheless expects the average monthly US contract price of polymer-grade propylene for 2014 to be about 2 cts/lb lower than in 2013, owing to a slightly lower crude oil price forecast.
Aromatics production in North America has likewise been undercut by the shift to NGL cracking, and supply has been constrained by growing demand for toluene and xylenes to boost octane content. Operating margins for reformers have been extremely low of late, making toluene and xylene prices very sensitive to reformer naphtha prices, which are expected to continue strengthening, pushing toluene and xylene prices upward in January and February, IHS Chemical says.
IHS does not expect ethylene demand in Europe to improve much in 2014, given weak downstream markets. Continued restraint on the part of cracker operators will keep the market in balance, and margins will be similar to those of 2013. Oil prices are expected to decline, resulting in a slight decline in the price of ethylene.
The situation is similar for propylene in Europe, although the market balance is more price-sensitive. “During 2013, the European market has been able to maintain a degree of balance that had been severely lacking in 2012, and it may be possible to see the same dynamic in 2014,” IHS Chemical says. The impending overbuild of propylene capacity in China will make the task more difficult, however.
Benzene was in plentiful supply in Europe before recent hiccups in production, and that situation should soon return, IHS says. There are no new significant cracker outages expected in the next couple of months, and pyrolysis gas availability should remain good. The supply of toluene diisocyanate (TDI)–grade toluene in Europe should increase, helping meet increased demand with the start-up of Bayer’s new TDI unit at Dormagen, Germany, in the second half of 2014. The market is expected to remain fairly balanced.
China’s drive for self-sufficiency continues to reshape Asia’s olefin trade. The country’s ethylene import volumes increased by 40% in 2012, but IHS estimates that they increased by only 15–20% in 2013 and will soon begin to decline. South Korea supplies most of this material, but that situation is likely to change dramatically this year, when several South Korean exporters start up derivative units without increasing ethylene production.
Propylene supply is meanwhile expected to lengthen in Asia as new production units in China begin to come online early this year, IHS says. China’s propylene imports have grown more slowly in recent years and may decline in 2014. New export volumes from Taiwan will add to the excess, although a cracker closure in Japan this year and another in Taiwan in mid-2015 will ease the situation. IHS expects regional olefin margins to remain positive, however, with northeast Asian naphtha prices projected at about $40/m.t. lower in 2014 than in 2013, reducing cash costs for integrated crackers by as much as $50/m.t.
With turnarounds complete, high run-rates at integrated para-xylene (p-xylene) plants, and high naphtha cracker operations, benzene production has been robust in Asia, IHS says. The price of benzene is forecast to decline from December’s high in line with a soft US price forecast. The price will remain by far the lowest for benzene in the world, but the difference with the US price may not be large enough for arbitrage.
However, the toluene price in Asia is forecast to remain the highest in the world for several months. IHS projects that toluene demand will be seasonally sluggish for gasoline and solvent use but constantly high for transalkylation integrated with p-xylene plants. The market could change dramatically at the end of the second quarter, when a 1-million m.t./year p-xylene plant comes online at Ulsan, South Korea.—CLAY BOSWELL
Plastics: Mixed fortunes
Global capacity for polyethylene (PE) will reach 101.7 million m.t./year in 2014—an increase of just over 4% from 2013, according to IHS Chemical data. Worldwide production, meanwhile, is expected to go up by almost 5% in the coming 12 months, and average global operating rates are forecast to rise to 84.2%, 1 percentage point higher than last year. Demand for PE in North America will maintain its moderate growth during 2014 before major new production capacity begins to come online in 2015–17, IHS Chemical says. Average regional operating rates will remain in the low 90% range during 2014, IHS Chemical says. North American demand growth in 2014 will boost total PE volumes above the previous peak levels attained in 2007, IHS Chemical says. Separately, in the Mideast, Iran plans to commission up to five PE plants within the next year, although UN sanctions on Iran have delayed the start-ups of new facilities. In the United Arab Emirates, the Borouge 3 project, including major PE capacity, should be completed in 2014, IHS Chemical says.
In 2014, Worldwide capacity for polypropylene (PP) will increase by more than 6.5%, from 67.9 million m.t./year to 72.4 million m.t./year, according to IHS Chemical data. Total production will also go up, albeit at a slightly lower pace of 4.9%, IHS Chemical says. Average global operating rates will decline by 0.8 percentage point, to 81.1%, because of a recent wave of capacity additions, mostly in China, IHS Chemical says. Newly added and planned Chinese capacities are mostly for coal-based PP because of lower costs and the vast availability of coal in China, IHS Chemical says. As China slowly becomes self-sufficient in PP, exporters traditionally supplying the country will need to seek alternative markets, IHS Chemical says.
Conditions in the worldwide polyvinyl chloride (PVC) market, meanwhile, are expected to remain challenging throughout 2014. Suspension-grade PVC (S-PVC) capacity will increase by 6% during 2014, to 59 million m.t./year, IHS Chemical says. As producers trim production to match still-sluggish demand, the average operating rate in 2014 will be about 64.8% globally—1.1 percentage points lower than in 2013, IHS Chemical data show. Worldwide PVC demand is anticipated to reach 40.15 million m.t. in 2014, with an annual growth rate of 4.15%, offset by persistent oversupply.
Western Europe’s PVC industry remains fragmented, but there are signs of consolidation. The region’s largest producers, Ineos and SolVin—a joint venture between Solvay and BASF—aim to complete plans to merge their PVC businesses this year. The S-PVC capacities of Ineos and SolVin are about 1.8 million m.t./year and 1.2 million m.t./year, respectively, according to IHS Chemical data. Whether Kem One, the region’s third-largest producer—formerly part of Arkema—emerges from its financial difficulties is one of the key unanswered questions for PVC in Europe going into 2014. Elsewhere, North America’s PVC exports will grow on the back of the region’s improved cost position, and the Mideast will remain a significant exporter in 2014, IHS Chemical says.
Polystyrene (PS) will also face difficult times this year caused by the extreme price volatility of feedstocks benzene and ethylene, IHS Chemical says. Worldwide operating rates for PS will decrease by 2 percentage points this year, since global production will grow 1.9%, to about 10.6 million m.t., and demand will grow 1.7%, to about 10.6 million m.t., according to IHS Chemical data.—FRANCINIA PROTTI-ALVAREZ
Specialties: Growth gains momentum
Most forecasts call for continued solid growth in specialties volumes as the economic recovery gathers force in the United States and the new emerging-market middle class drives further growth. ACC expects US specialties volume growth to total 3.2% in 2014, after 4.8% growth in 2013, when the recovery from the downturn gained a foothold. IHS Chemical forecasts the value of the global specialty chemicals market to grow by 3.7%/year through 2017, when it will total $586.7 billion.
While growth rates may decelerate, at least in the United States, they will be underpinned a stronger economy and end markets.
Much of the growth in specialties from 2008 to 2013 was simply making up ground lost in the recession, since US specialties market volumes did not hit 2007’s peak again until last year.
Among specialties sectors, the coatings, construction, food, oilfield, and pharmaceutical markets have some of the most promising prospects for 2014, producers and analysts say. In coatings and construction, the US housing market appears to have definitively turned a corner.
“I don’t want to declare victory yet, but [construction] is becoming a tailwind, especially in North America,” says Howard Ungerleider, executive v.p./advanced materials at Dow Chemical. US housing starts will not take off anytime soon, but the trend is generally positive after the doldrums of the past few years, according to ACC. Even commercial and institutional construction, which tends to lag residential construction, is experiencing “glimmers of growth,” Ungerleider says.
Trends in food and pharma, meanwhile, are heavily tied to aging populations in the developed world and rising middle classes in emerging markets. FMC “sees a lot of robust demand” for nutraceutical ingredients, such as omega-3s, across the world as a result of these trends, says Mike Smith, v.p/health and nutrition at FMC. The company also sees opportunities for food ingredients in developed markets as new consumers seek novel ways of getting protein, which can be expensive in places like China and India, Smith adds.
Some end markets, however, are in the process of rearranging themselves. As the semiconductor market has had “basically zero growth” for three years running, electronic chemicals makers are shifting to higher-growth, areas such light-emitting diode (LED) displays, Ungerleider says. Dow Advanced Materials expects year-on-year growth in 2013 for its electronics business almost entirely because of growth in LEDs, organic LEDs, and advanced packaging materials for semiconductors, he adds. Next year, those segments are expected to drive growth in electronic chemicals again, although Ungerleider anticipates some rebound in the semiconductor space. Dow expects 3% growth in semiconductor industry revenues in 2014 and 4–5% growth in subsequent years. “It will grow, just not as fast as the past couple of decades,” Ungerleider says.
Back in North America, the hydraulic fracturing boom is driving rapid growth in the oilfield chemicals space. That growth, however, is highly dispersed among different producers, according to Ray Will, director at IHS Chemical. Hydraulic fracturing is giving big demand boosts to biocides, water-soluble polymers, additives for drilling, suspending particles, and other materials, he adds. “But, we are talking about dozens of products across many different kinds of product lines,” Will says. “A lot of companies are exposed to this in a small way, so it gives them all a moderate boost.” Still, a moderate boost is better than no boost at all.—VINCENT VALK
Renewable: New opportunities emerge
Momentum in renewable chemicals is expected to continue growing in 2014 as large-scale projects are commissioned and biobased processes become part of strategic plans at large chemical companies. Products that are not cost-competitive and fail to offer equivalent or superior performance attributes will struggle to find a foothold in the global chemical industry, however.
Mark Morgan, global managing director/renewables at IHS Chemical, expects green chemicals’ development to continue, although the focus needs to be on performance and competitiveness. “The continued emphasis on shale gas has led to a reduced emphasis on biobased commodities, where there is direct competition in shale gas–related derivatives,” he adds.
The flood of cheap ethane in North America has already pushed two high-profile projects to the back burner. Braskem, the largest producer of bioplastics, said in early 2013 that it would hold off on a previously announced investments in polyethylene (PE) and polypropylene capacities based on sugarcane ethanol in order to free up capital for gas-based petrochemical projects. Dow Chemical has also postponed plans for a green PE complex in Brazil. IHS Chemical estimates that PE based on sugarcane ethanol is 15–20% more expensive than petroleum-based ethanol.
Morgan expects the development of biobased building blocks for polyamides to continue in 2014. “Biobased adipic acid has a future based on its theoretical competitiveness and aromatic derivatives not favored by shale development,” although attention must be paid to adipic acid quality and the level of trace impurities, he adds. A detailed IHS Chemical Process Economics Program report finds that the economics of biobased adipic acid production look encouraging.
However, Morgan remains cautious on biobased hexamethylenediamine (HMDA), the other component needed for nylon-6,6. “It is possible to convert adipic acid into HMDA; ICI used to do this in the 1970s at Wilton in the UK, and Pringdingshan in China also ran this kind of process,” he says. “Both these units no longer operate, as there is a market for adipic acid and the overall conversion is uneconomic. However, it comes down to a decision regarding where and how you take your margin and where you make your return; clearly, in the past, ICI considered HMDA from adipic acid unworkable, but maybe circumstances for this conversion need revisiting as well as possible alternative bio-routes.”
New applications for biobased succinic acid will come about in 2014, given that the dicarboxylic acid is now being produced in quantity, says Marifaith Hackett, senior consultant at IHS Chemical. Biobased succinic acid is a feedstock for polybutylene succinate, a biodegradable polymer, and a potential starting material for polyester polyols and novel plasticizers. In addition, biobased succinic acid can serve as a starting material for 1,4-butanediol and tetrahydrofuran.
Myriant Corp. (Cambridge, MA) started large-scale production in mid-2013, while Succinity, a joint venture of BASF and Corbion Purac, plans to start production in early 2014. Reverdia, a jv of DSM and Roquette, initiated production in December 2012. BioAmber continues to produce biobased succinc acid on a smaller scale but says it remains on track for mechanical completion of its biobased succinic acid plant in the fourth quarter of 2014.
The development of specialties derived from biobased materials will also continue in 2014, Morgan says. Biobased methionine projects announced by Roquette and a CJ/Arkema indicate “an interest in completing the amino acid portfolio from a biobased perspective.” Primary amino acids lysine, threonine, and tryptophan are made via biotechnology today, whereas for many years DL-methionine and its analogue have been made from acrolein, hydrogen cyanide, and methyl mercaptan, he adds.
“A biotech process for methionine may be greener and cost-effective,” Morgan says. “One factor to consider in addition is that a bioroute generates 100% L-form with maximum activity, whereas chemical routes generate DL-methionine. The cost per active weight of methionine could prove a powerful sell. However, there would still be a need for careful reformulation of animal feed nutrition systems to accommodate this very active material, and, hence, there is once more a need possibly for multiple suppliers for market uptake.”
Flavor and fragrance products and related industries, like personal care, also have an opportunity to take further advantage of biobased terpenoids, Morgan says. Farnesene and derivatives like squalane, produced by Amyris (Emeryville, CA), illustrate that one can enter the flavor and fragrance market at different points in the production cycle. Accessing some of the smaller-volume, higher-value-added products via biotechnology could provide new opportunities, Morgan adds.
Christophe Schilling, CEO and founder of Genomatica (San Diego), expects the recent start-up of large-scale cellulosic ethanol plants to help accelerate biochemical development. “I think this will help people to really see the opportunity these attractive feedstocks and supply chains offer and how to put all the pieces in place to be able to leverage it.” He also notes that the industry has matured and will continue to advance in 2014. “We’re getting into the real substantive emergence of the field,” Schilling says. “Commercial plants are being built; products are being sold commercially. For many years, it was really about a technology vision, and that’s now translated into commercial reality. I think you will see more of that in 2014—real substantive advancements that show that this industry is starting to get its feet and have a real commercial impact.”—REBECCA COONS
Agriculture: Optimism turns to caution
The 2014 outlook for seeds and agricultural chemicals demand in the United States is cautious, since depressed commodity prices are expected to drive corn acreages down 3–5% year-on-year, and both seeds and ag chemicals will struggle to achieve prices increases, says Jim Loar, senior v.p./sales and marketing, agribusiness at Wilbur-Ellis (San Francisco), an international marketer and distributor of agricultural products.
USDA expects 2013 net farm income to be $131 billion, up 15.1% from 2012, but says lower crop prices will likely lead to softer net income in 2014. USDA says the 2013–14 season average farm price for corn will be $4.05–4.75/bushel, down from a record of $6.89/bushel in 2012–13—a harvest dramatically impacted by drought—and expects that 2014–15 prices will retreat even further.
“The optimism experienced going into 2013 has been replaced by caution going into 2014,” Loar says. “Depressed commodity prices have caused a reset of fertilizer prices and ag chemicals will struggle to achieve inflationary-driven price increases. Seed suppliers have announced price increases averaging approximately 4% going into 2014. However, we are likely to see local discounting as growers push back against today’s commodity crop prices.”
Total crop acreage should not appreciably change, and thus crop mix, environmental conditions, and pest pressure will determine ultimate demand, Loar adds. “Today’s commodity prices and input cost realities should drive corn acreage to beans, unless we see a significant decline in soy bean prices before March. Grain sorghum may also benefit at the expense of corn if the drought persists in the Southwest and lower plains states. Small grains, rice, and cotton acres could also see slight acreage increases going into 2014,” Loar says.
USDA notes that exports have benefitted from lower corn prices and increased global consumption.“Competitive prices have restored the United States to top place in the global corn market with the US share of trade projected at 33% compared with 18% in 2012–13. Generally higher corn trade worldwide has also enhanced demand for US corn,” it says. Also, a sharp drop in October–November 2013 soybean exports from Brazil and Argentina has left US shipments to largely accommodate the world’s current import needs.
According to USDA’s export inspections data, November 2013 soybean exports—at 317 million bushels—were likely the largest of any month ever. Robust exports of soybeans and soybean meal have bolstered their cash prices; USDA recently raised its forecast range for the soybean season-average farm price by 35 cents, to $11.50–13.50/bushel.
Meanwhile, increasing herbicide and insecticide resistances are driving demand for effective ag chemistry combinations, Loar says. “Adequate, proven chemistries in a tank mix, for preplant or post-plant’s spray programs, offer growers the weapons needed to combat resistance.”
Biopesticide R&D and investments are also increasing, but the winners thus far have been the new classes of greener insecticides, Loar adds. “We are definitely seeing a shift, at least in the insecticide arena, to these new and effective solutions. True biopesticides must prove that they can stand alone against pests to gain widespread use. Today, many are used in combination with long-proven chemical technologies.” Regulatory pressures are increasing, and, in combination with economic considerations, are helping drive innovation, he adds.
BASF, the third-largest producer of agricultural chemicals, behind Syngenta and Bayer CropScience, estimates that the global crop protection market—valued at approximately $53.7 billion in 2012—will grow at 2–3%/year in the next five years.—Rebecca Coons
Fertilizers: Producers forecast 2014 rebound
Fertilizer makers are optimistic after a volatile 2013. Uncertainty has cast a shadow in potash markets, since the summer breakup of the Belarusian Potash Co.—one of two large potash export conglomerates—delayed contracts and stagnant farm output in India weakened earnings in the second half of the year.
“We are guardedly optimistic about the potash demand outlook,” says Mike Rahm, v.p./market and strategic analysis at Mosaic. “Global shipments of potash and phosphate will increase and demand will rebound: Fundamentals are good. Several other factors underpin our demand forecasts, with one being farm economics. Farm profitability and net cash farm income are expected to remain elevated in 2014 but not as high as the last few years, when agricultural commodity prices spiked to record levels in 2008 and again in 2011.”
Inventory was kept low since prices trended down in 2013, Rahm says. Nitrogen prices will rebound $30–40/m.t. on average for 2014 from the lows of fall 2013, he says. Nitrogen prices bottomed in late October 2013 and have rebounded $50–75/ m.t. since. For example, the price of urea on a barge in New Orleans jumped to about $350/m.t. as of 6 January 2014 compared with around $275/m.t. in late October 2013, he says.
Phosphate prices bottomed about a month later and have rebounded by about the same amount. The price of diammonium phosphate on a barge in New Orleans has increased from about $315/m.t. in late November 2013 to around $375/ m.t. as of 6 January 2014.
“Distributors are not going to be able to live off the pipeline to the same extent as they did in 2013,” Rahm says. “The poster child for lean distribution is India because the situation there has been complicated by other factors such as subsidy cutbacks and increases in retail prices—exports there have dropped in half.”
Rahm believes prices will rebound in 2014—particularly with urea and phosphate. There are signs of pricing reaching a pricing bottom partially because of large contract customers in China and India. The market is waiting on how settlements shake out, and, once those contracts are settled in January, a “fair amount” of demand will come to the market, Rahm says. “We have a fairly high degree of confidence of a nice rebound and increase in demand.”
Fertilizer prices softened during 2013, since each nutrient faced unique supply and demand challenges, according to PotashCorp’s fourth-quarter market analysis report. The large crops produced this year will have removed record amounts of nutrients from the soil, which should support fertilizer consumption in 2014, PotashCorp says. “Despite the potential for lower farm income in 2014, we anticipate a healthy economic environment relative to historical standards,” the company says.
When it comes to production, though, Rahm says that he is less certain about the outlook and that it will be an important driver for the direction of pricing. Global potash and phosphate shipments will increase to 64–66 million m.t., up from the 63–64 million in 2013, Rahm says. Potash demand will rebound to 57–59 million m.t., up from 53–54 million m.t. PotashCorp expects global potash demand to increase to 53–54 million m.t. as well, and shipments could reach 55–58 million m.t. next year.
“Shipments at the low end of our range could occur if market uncertainty persists into the first half of 2014, impacting buying patterns in major offshore markets,” PotashCorp says. “Demand at the higher end of the range would require greater market engagement early in the year, including a significant improvement in demand from India.”
Rahm is encouraged that global markets will come back. “Up to this point, it has been a tale of two hemispheres: The Americas were strong in terms of demand, but the eastern hemisphere was less robust—but India may come back,” Rahm says. “They are a large importer of products driven by good farm economics, as they are continuing to apply technology to crops. More hectares are being produced. Brazil has also been a good market, and we expect that to continue.”—LINDSAY FROST
Industrial gases: Crackers to increase gas business
The US shale revolution resulted in a number of projects for industrial gas producers in 2013—and they expect strength to continue into 2014. Crackers in the Gulf created gas opportunities with air separation units; extended pipelines; and related nongas business, such as technology and equipment for new liquefied natural gas (LNG) trains.
“When we talk specifically about cracker investments, a key area for this growth is along the Gulf Coast,” says Michael Graff, chairman and CEO of American Air Liquide. “In 2014 and beyond, we are looking to further expand our business in this area, building on our existing pipeline infrastructure along the Gulf Coast.”
Industrial gas companies are also growing in refining, steel, health care, oil and gas, and electronics. “New technologies and the use of liquid nitrogen and carbon dioxide in enhanced oil recovery and hydraulic fracturing for natural gas are further advancing the ability to develop wells more efficiently, productively, and sustainably, using substantially less water,” Graff says.
As far as overall growth is concerned, Air Products expects modest GDP growth, 2–4%, the company says in its 2014 outlook. “We expect that the US will grow 2–4%, as it continues to face unresolved fiscal challenges, weak job growth, low consumer confidence, and lower global demand.” However, the company says it is “hopeful” that an economic recovery well begin in Europe with 0–2% growth. China will grow 5–7%, and South America, which is largely dependent on global demand driving exports, will grow 1–3%, the company says.
Regionally, the United States will be the strongest spot for industrial gas producers as extensive pipelines grow in the US Gulf. Field operations in key regions, such as Bakken in North Dakota and the Eagle Ford, Barnett, and Permian basin region in Texas and New Mexico, are contributing to strength as well.
“There is a renaissance of manufacturing and growth due in great part to the abundance of energy at relatively low prices,” Graff says. Looking outside the United States, Air Liquide says it sees continued promise in South America—particularly in Brazil. China, the Middle East, and Eastern Europe.
By segment, electronics was one of the weakest in 2012 and 2013, Air Products says, though it expects a rebound in 2014. “Overall, we expect silicon growth of 3–5% in 2014,” the company says. “Additionally, we expect business to benefit from the 2013 cost-reduction actions and product-line restructuring.”
Tighter areas, as far as supply goes, has been helium—though Air Liquide says supply is now stabilizing and growing because of a combination of new global sources coming online and recent legislation enacted to reauthorize domestic production in the United States. The company also recently brought online a new helium source in Qatar.
“Argon has also seen recent supply challenges, but as more air separation units are commissioned due to rising demands of industry for oxygen and nitrogen, argon production is also in the increase,” Graff says.
Air Products says it expects higher earnings in 2014 from new plant onstreams, higher LNG activity, and volume loading on existing assets—recognizing that the last factor will be most influenced by the economy. However, the company expects lower earnings from the shutdown of its polyurethane intermediates business. In merchant gases, volume growth will “continue to be influenced by the economy,” the company says.
Air Liquide says that for 2011–15, it expects average annual revenue growth globally of 5–7%, driven by three major trends—industry globalization and resource constraints, evolving consumption patterns, and demographics.
“We are optimistic about the year ahead,” Graff says. “Low-cost natural gas continues to drive a renaissance in a broad array of manufacturing including chemicals, refining, and steel. This growth will continue to be influenced by global economic conditions and domestic regulatory policies and will rely on our ability to navigate these challenges while continuing to innovate, serve markets, and meet customer needs.” —LINDSAY FROST
Finance: Big deals in the pipeline
Chemicals M&A activity looks set for a robust year in 2014. Several chemical makers have put up assets for sale in recent months. Assets include Ashland’s water treatment business and many of Dow Chemical’s commodity chemicals assets. Dow’s divestitures are worth $5 billion/year in revenues, and sources say Ashland’s water business could attract a $1-billlion-plus offer from private equity.
DuPont, meanwhile, is spinning off many of its commodities assets. “Lots of companies are putting noncore businesses on the market because they figure it is a good time to be exiting and the market conditions we have today will not last forever,” says Telly Zachariades, partner with The Valence Group (New York).
Favorable credit and financing—which has been available for some time now—underpins the current spate of big announcements. “Financing is wide open, and the larger deals are more impacted by the financing markets,” says Mario Toukan, managing director and head/chemicals at KeyBanc Capital Markets (Cleveland, OH).
Bankers expect financing to continue to be relatively cheap in 2014, though they also agree that current conditions are not permanent. “I don’t think it will be another year or two where people finance deals at 5.5 times (x) or 6x debt,” Toukan says. “As that cools, it will impact activity and valuation.”
However, bankers do not foresee any particular event that will hit financing markets; rather, what goes up most go down. “The cost of debt today, which is an important factor driving M&A activity, is historically well below average,” Zachariades says.
The strong financing markets are, obviously, a boon to private equity, which still has lots of cash to deploy, bankers say. This situation means private equity firms are able to submit big bids for big assets. While companies are also sitting on large cash piles, private equity is generally competitive in situations involving orphan assets—businesses, often large, which have few, if any, logical buyers —and niche spaces with roll-up opportunities. Companies, meanwhile, continue to be conservative about acquisitions. “I don’t think the adjacent acquisitions theme has run its course yet,” says Paul Graves, CFO of FMC.
Equity markets, meanwhile, are unusually favorable for chemicals. “For the first time since probably 2006, we are seeing public market valuations that rival or exceed M&A valuations,” says David Bradley, global head/chemicals investment banking at Jefferies (New York). “I think we may see a good year for initial public offerings.”
In terms of subsectors, “anything to do with oil and gas chemicals, food ingredients, personal care, next-generation electronics or battery technology, advanced materials, water treatment, and agrochemicals” is generating a lot of M&A interest, Zachariades says.
Some sectors, such as construction materials, are generating interest because they are at an attractive point in the business cycle. “The cycle looks to be going up” in construction, “and so the play involves riding the rebound, particularly in North America,” Zachariades says.—VINCENT VALK