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Cover Story

July 26, 2010
Volume 88, Number 30
pp. 13 - 16

Global Top 50

Sales tumble as C&EN’s ranking shows the full force of the recession

Alexander H. Tullo

Lanxess makes butyl rubber at this plant in Belgium. Lanxess
GLOBAL GIANT Lanxess makes butyl rubber at this plant in Belgium.
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Anyone seeking to describe what 2009 was like for the chemical industry could dust off a copy of Charles Dickens’ “A Tale of Two Cities” and recite the opening line: “It was the best of times, it was the worst of times …” The contrast for the chemical industry isn’t Dickens’ light and darkness or wisdom and foolishness, although those metaphors might hold for the economy in general. The contradiction for the chemical industry was solid profitability in the face of plummeting sales.

The financial crisis and ensuing recession had devastating effects on chemical sales. Starting in the fourth quarter of 2008, shipments ground to a halt and prices for chemicals collapsed. The industry’s customers, such as plastics converters, stopped buying raw materials. Instead, they processed the inventories they had or slowed production, selling off stocks of their own products.

C&EN’s survey of the Global Top 50 chemical companies, which is based on 2009 data, reflects a year that began on the lowest of notes. And although conditions improved from the depths of the crisis, the industry still hasn’t fully recovered.

Together, chemical revenues at the 50 firms declined by 21.0% compared with 2008 to $697 billion. All but four—South Korea’s LG Chemical, India’s Reliance Industries, the U.S.’s Mosaic, and South Africa’s Sasol—posted sales declines in 2009.

Interestingly, profits held up better than sales did. Fifteen companies actually managed to increase chemical profits in 2009. And overall, the 46 companies that publicly disclose operating income posted $49 billion in profits, a decline of only 6.2%. The same companies posted a sales decrease of 19.0%.

A few factors explain the relative strength of profitability. At the same time that chemical makers were watching sales decline, the prices of energy and raw materials were dropping as well. Plus, chemical companies cut costs by laying off workers and restricting administrative budgets.

The sales decline had an impact on the companies making the ranking and the slots they occupy, but most of the familiar names are present. BASF swallowed a 17.8% sales decline in 2009, but the $54.8 billion it took in was enough to put it at the top of C&EN’s survey for the seventh consecutive year. Dow Chemical again came in second despite a 22.0% drop in sales.

Among the top firms, the biggest gainer was Sinopec (China Petroleum & Chemical Corp.), which jumped from number seven to number three. Its sales decline of only 13.4% allowed it to advance compared with companies that saw sales decline more sharply. Similarly, Taiwan’s Formosa Plastics rose from 10th last year to seventh in the current ranking.

A few companies near the top suffered big declines. Ineos saw a 39.1% drop in sales to $28.6 billion, pushing it down one place to fourth. Saudi Basic Industries Corp.’s sales declined by 32.9% to $23.1 billion, knocking it to ninth from sixth place last year.

As a rule, the sharp declines in petrochemical and fertilizer prices in 2009 caused companies that make such commodities to suffer a steeper drop in sales than did companies that are oriented toward specialties. Case in point is ExxonMobil Chemical, which saw a 30.1% drop in revenues in 2009. It retained its number five ranking, but it barely edged out DuPont, which experienced only a 14.6% decline.

The impact of the recession was even more dramatic toward the bottom of the ranking. Last year, the number 50 position was inhabited by Israel Chemicals, with $6.9 billion in sales. This year, it is Japan’s Hitachi Chemical, with $4.9 billion in sales.

Hitachi is one of six firms in this year’s ranking that didn’t appear in C&EN’s previous Global Top 50. The others are Tosoh, Merck KGaA, Dow Corning, Celanese, and Eastman Chemical.

Conversely, six companies that were in last year’s ranking don’t appear this year. PetroChina, ranked 17th last year, is off the list because it started combining refining and chemical results. National Petrochemical Co. of Iran didn’t provide financial figures this year. Rohm and Haas was acquired by Dow Chemical. Sales declines at Israel Chemicals, Potash Corp., and Nova Chemicals pushed them off the list.

The economic recovery will determine what will happen to chemical sales, and thus the Global Top 50, in 2010 and subsequent years. One worry is that the U.S. will slip back into a recession.

Frederick M. Peterson, president of 
Hanover, N.H.-based consulting firm Probe Economics, thinks the talk by pundits of a double-dip recession is overblown, although he does warn that the economy will have some soft spots. With high taxes, greater frugality, and tighter credit, Peterson predicts, U.S. gross domestic product growth will be an anemic 2.0 to 2.5% in the near term. “Slow growth is probably where we are headed in the next few years,” he says.

Another big influence on C&EN’s ranking is merger and acquisition (M&A) activity, which slowed as a consequence of the financial crisis. The two largest deals since then, Dow’s purchase of Rohm and Haas and BASF’s buy of Ciba, were announced in 2008, before the full gravity of the crisis became clear.

M&A has picked up since the recession ended. Last month, BASF announced a $3.8 billion deal to buy personal care ingredients maker Cognis. Air Products & Chemicals is pursuing a hostile takeover of Airgas for $7.2 billion. Bain Capital bought Dow’s Styron styrenic polymers unit for $1.6 billion. And Rhodia agreed to buy Chinese surfactants maker Feixiang for $489 million.

Alasdair Nisbet, global head of chemicals at the investment bank Lazard, says the climate favors small to midsized deals in the $100 million to $500 million range over blockbuster mergers. “There is a general willingness to do deals now,” he says, “but the industry is unlikely to see many multi-billion-dollar transactions in the near future.”

“Slow growth is probably where we are headed in the next few years.”

Nisbet explains that most of the businesses available for purchase are assets that were bought by private equity firms before the downturn. “Most of them have had a fairly challenging 2008 and 2009,” he says. “Anybody who has been through that is very keen to take profits.”

Meanwhile, chemical companies that cut costs and conserved money during the crisis are finding themselves with more cash on their balance sheets than they really need now that the economy is improving. “They feel that their cash balances provide acquisition currency,” Nisbet says.

The primary drivers behind the choice of acquisition targets, Nisbet says, are regional product consolidation and geographic diversification. Western companies are looking at purchasing assets in Asia to follow customers into growing markets. At the same time, Indian and Chinese firms are increasingly interested in buying operations in the U.S. and Europe. “I have no doubt that, in the next two years, you are going to see some major acquisitions by Chinese firms of Western businesses, divisions, and maybe even entire companies,” he says.

But smaller acquisitions don’t do much to the relative size of multi-billion-dollar companies. Readers might have to wait a year or two before they see deals large enough to have an impact on the Global Top 50.

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