Global Chemicals Sector: Modest Growth, Continued Cost Focus in 2010

Highlights

Chemical companies have to take a harder look at structural costs.

If chemical companies will not continue to invest in research, competition from Asian countries could be very harmful for Europe.

Growing the customer base is another key objective in 2010 but could be challenging due to changing customer preferences.

Mergers and acquisitions (M&A) are also expected to rise as a strategic priority.

Brussels, 29 March 2010 — The global chemicals sector is projected to see a modest uptick in growth during 2010, according to a new report by the Deloitte Touche Tohmatsu (DTT) Global Manufacturing Industry group, Compass 2010: Global Chemicals Sector Outlook. While underlying market demand is improving globally, it is uneven across major end-markets. A gradual rebound in the automotive, construction, electronics, and pharmaceutical markets are potential bright spots for the chemicals sector.

This year, global chemical companies will recalibrate their business objectives and make tougher strategic choices as critical end-markets begin to recover,” says Eric Desomer, Deloitte Belgium Manufacturing Group Leader. “By using the lessons learned from the downturn, executives will create short-term plans that reflect existing business realities, yet incorporate the ability to meet future economic turbulence.”

Many chemical companies are expected to extend cost-saving initiatives throughout 2010; however, such efforts are beginning to yield diminishing returns. This will force chemical companies to take a harder look at structural costs. For better alignment with market realities, strategies will emphasise simplification, streamlining processes, and closely managing input costs. Furthermore, companies are beginning to scrutinise and adjust their supply chains and to deploy flexible human capital approaches in order to address the gradual demand recovery.

“In Europe, there is a sense of uncertainty relating to the economy, due to rising concerns about government budget deficits. This pressure is creating further uncertainty in the sector, with little optimism for increased demand levels,” Tom Van Cauwenberge, Deloitte Belgium Chemical Group Leader, points out.

Additional imperatives have emerged for 2010. For commodity companies, innovative business models designed to preserve cash and to increase free cash flow will counter the effects of slimmer margins. For specialty companies, the focus will be on growth and profitability through new applications and services, geographic markets, and core technologies. The high-performing integrated players will continue to move downstream to acquire assets with greater value-creation potential and less selling, general, and administrative (SG&A) expense.

“When looking at the 2010 forecasts of several Belgian chemical sector market players we see the same trends appearing,” says Tom Van Cauwenberge. Companies such as the Tessenderloo Group[1] and Taminco[2] recently communicated that they expect economic activity to recover, albeit gradually.

“The austerity of cost reduction measures and tight cash control will be, given the market uncertainty on the demand side, the levers for the overall profitability of the sector,” says Tom Van Cauwenberge.

Deloitte member-firm chemical leaders foresee growth opportunities in 2010 as a result of innovation efforts in key technology areas such as energy, health care, and climate change. Government stimulus packages have made some contribution to the research and development (R&D) efforts to drive innovation, though constraints on R&D budgets will encourage chemical companies to increase collaboration with academia and niche technology entities in order to bring ideas to market. European companies in commodities that fail to invest in research will be greatly harmed by competition from Asian countries.

According to the outlook, growing the customer base is another key objective in 2010, but one which may be challenging due to the changing customer preferences that have resulted from the downturn. Additionally, portfolio management has assumed increased importance as companies with a combination of commodity and specialty businesses need to take a fresh look at the ones that thay should continue to run as specialty products and receive capital growth opportunities.

Mergers and acquisitions (M&A) are also expected to rise as a strategic priority this year in the chemicals sector. Many companies are actively evaluating targets in order to complement their current mix of businesses, and will be looking to capitalise on their opportunities over the course of 2010 as credit markets improve and valuations become more attractive.

[1] Tessenderlo Group Quarterly Report – December 2009. Tessenderlo Group 2009 results: “significant net loss confirmed but solid cash flow from operations despite very challenging economic environment” (Press Release 12 February 2010); URL: http://www.tessenderlo.com/news_media/news/2010/results_2009.jsp
[2] Taminco Full Year Results – Taminco Group NV “Improved profitability based on resilient business model” (Press release 3 March 2010); URL: http://www.taminco.com/news/press-releases/taminco-announces-it-full-year-results-for-2009.html