Chemical industry executives are going after strategic acquisitions and new product development to lift growth in the coming year in the face of “escalating input costs, stiffer competition and a struggling global economy,” according to a survey by KPMG LLP.
Nearly three-quarters (72%) of the 156 senior level executives surveyed in the United States, Europe and the Asia Pacific said they have “significant” cash on the balance sheet, up slightly from 70% in 2011, said the KPMG Global Chemicals Industry Outlook Survey. Cash positions have improved from a year ago, said 51%.
The survey was conducted in July with 53 U.S. respondents, 53 in the Asia Pacific and 50 in Europe. Based on revenue in the most recent fiscal year, 22% work for institutions with annual revenues exceeding $10 billion, 35% with annual revenues of $1-10 billion, and 44% with revenues in the $100 million to $1 billion range.
“Despite economic headwinds, the chemicals sector has experienced some positive momentum in the past year,” said KPMG’s Mike Shannon, global leader of the chemicals and performance technologies practice. “The improved cash positions at many of these companies will allow them to be more aggressive to drive growth and innovation, both organically and inorganically.”
CHS Inc., the nation’s largest farmer-owned cooperative, earlier this month announced plans to build a $1.1-1.4 billion nitrogen fertilizer manufacturing plant in North Dakota that would take advantage of natural gas feedstock to provide U.S. and Canadian farmers with enhanced supplies of crop nutrients (see Daily GPI, Sept. 14). Also this month Orascom Construction Industries, Egypt’s largest company, agreed to make the largest single investment ever in the state of Iowa ($1.4 billion) to build a nitrogen fertilizer plant to tap domestic natural gas supplies (see Daily GPI, Sept. 7).
In August Westlake Chemical Corp. executives credited 2Q2012 profit gains to lower-cost energy and feedstocks, including ethane from the shale gas boom (see Daily GPI, Aug. 6). Westlake manufactures and supplies products within two primary segments: olefins and vinyls. Abundant regional supplies of natural gas also drew Methanex Corp., the largest methanol supplier in the world, to Louisiana to construct a methanol plant (see Daily GPI, July 30).
Sixty-three percent of all of the executives surveyed said they plan to increase capital spending over the next year. About half (48%) of the U.S. respondents expect to spend more in 2013, versus 58% of those in Europe. In the Asia Pacific region 81% said they plan to spend more, which is down sharply from last year’s survey, when 100% said they would spend more in 2012.
The highest priority investment areas for those surveyed were new products or services (35%), as well as mergers and acquisitions (M&A), which was the highest priority for one-third. U.S. executives (42% products; 45% acquisition) indicated that they would be more aggressive than their peers in the Asia Pacific (26% products; 23% acquisition) and Europe (36% products; 32% acquisition).
“Overall, chemical executives are telling us that they intend to put their money to work and boost investment in key areas,” said Shannon. “With the struggling global economy, organic growth is a challenge and input prices continue to impact production costs. All of these factors set the stage for aggressive M&A and product development strategies as companies look to gain an edge.”
Nine out of 10 of the executives said their companies likely would be involved in M&A within the next two years, up from 83% in 2011. U.S. respondents were most bullish on being buyers (48%), while more than half of the European respondents said they were the most likely sellers (52%).
Technology (29%) and geographic expansion (27%) were identified as significant areas of investment, with Asia Pacific respondents putting the highest expectations on investment in technology (42%), and Europeans more likely to expand geographically (36%).
When analyzing the individual regional responses, “U.S. and European executives showed a much stronger preference for domestic investment. Unsurprisingly, China remained a favored investment location for executives in all three regions,” said KPMG.
The macroeconomic environment “is far more of a worry for executives than this time last year,” the survey said. KPMG’s Paul Harnick, global COO for the chemicals and performance technologies practice, said U.S. and European executives were more concerned about the global economy than their Asian peers.
Sixty-eight percent expect revenue to increase in 2013, which is down from 85% in last year’s survey. U.S. executives were the most bullish in their revenue projections, with 73% expecting higher revenue, versus 77% a year ago. For Asia-Pacific executives, revenue expectations have fallen sharply to 69% from 96% last year. In Europe, 60% expect to see higher revenue, versus 82% in 2011.
Executives also were less optimistic about hiring, with 65% expecting to hire more people in 2013, versus 73% a year ago. Asia Pacific was most bullish (77%), followed by Europe (58%) and the United States (56%). “In the U.S., 21% of executives actually expect to decrease headcount in the next year,” versus 14% a year ago.
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