Issue Date: July 23, 2007
Global Top 50
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FOR THE FOURTH YEAR RUNNING, BASF and Dow Chemical are the leading two companies in C&EN's survey of the global Top 50 chemical companies. And for the first time, in what has become a good-natured but intense rivalry, BASF leads Dow, although the two companies' chemical sales differ by less than 2%.
No surprises there. And no surprises, either, in the presence of the chemical businesses of oil giants Royal Dutch Shell, ExxonMobil, China Petroleum & Chemical Corp. (Sinopec), and Total in the top 10. A surprise did come in, though, with the dramatic entry into the top five of Ineos Group, which has been cobbled together by a string of major acquisitions. As recently as 2004, Ineos was near the bottom of the ranking, with sales estimated at $5 billion.
The other companies making up the top 10 in this year's survey are DuPont, Formosa Plastics Group, and Bayer. Last year's number 10, Saudi Basic Industries (SABIC), was nudged into the 11th spot this year.
This year's Top 50 companies comprise a group whose combined worldwide sales are $716.8 billion, according to the companies' 2006 financial results, up 15.3% from the previous survey. The sales of last year's Top 50, based on 2005 results, had been up 14.9% from the year before.
The sales cutoff this year was just shy of $6 billion; Brazil's Braskem made its maiden appearance in the survey with sales of $5.98 billion. The number 50 company in last year's survey, by comparison, was LG Chem, with $5.47 billion in sales. The South Korean company's sales this year include consolidated results—they weren't available by C&EN's deadline last year—and are significantly larger.
The industry's profitability continues to increase, the survey confirms. The aggregate operating profit margin in this year's survey was 9.5%, up from 9.1% last year.
How long the group's profit margin will continue to be so strong is unclear. Some 20 companies in this year's survey showed a drop in operating profits. Encouragingly, however, only one company, Sasol, posted an actual operating loss, and that reflected major restructuring for the South African company.
Although sales are up overall, this year's ranking includes 10 companies whose sales declined, whereas last year only three of the Top 50 showed a decline in sales. To a large extent, these declines reflect divestitures of businesses by firms seeking more limited portfolios. The global industry today is being shaped as much by big acquisitions and mergers as it is by companies selling off businesses that are no longer considered core.
Sometimes, the fragments are sizable enough to take their own spot in the rankings along with the former parent. For example, Arkema, which was spun off by Total last year, enters the rankings at the number 41 slot. That appearance mirrors the way Lanxess showed up in last year's survey with its former parent, Bayer.
Of course, big acquisitions still take place in the chemical industry. Linde's purchase of fellow industrial gases producer BOC, for example, catapulted the German company into this year's ranking while removing BOC from the list.
Ineos, formed in just 1998, is a star example of using acquisitions to build a giant company focused on the commodities that many other chemical producers are trying to move out of. Jonathan Tyler, the London-based director of corporate finance at international investment bank Houlihan Lokey, observes, "I think the truly interesting business case is Ineos, which over 10 years has moved from virtually nowhere," to being one of the largest chemical companies in the world. "That's not bad going, however you look at it," he says.
As a private company, Ineos does not report financial results. However, when the company agreed to acquire BP's Innovene polymers business last year, it said the buy would give it annual sales of $33 billion. Since then, it has followed that megadeal with several more, vacuuming up assets and market share in the commodities field.
BP, meanwhile, still has a significant chemicals business, but "chemicals" as a segment has now become a minor and unidentifiable part of other sectors within the giant oil company. BP consequently dropped out of the C&EN ranking this year.
THE GEOGRAPHIC makeup of sales rung up by the global Top 50 continues its inexorable trend of redistribution. This year's survey, for example, shows that the sales of the top companies outside the traditional chemical-producing regions of the U.S., Europe, and Japan surpassed those of top Japanese companies for the first time. Four years ago, eight Japanese firms made up 13.0% of total chemical sales, while six companies from outside the traditional regions accounted for 8.3% of sales. This year, seven Japanese companies accounted for 11.9% of sales, and nine outside firms contributed 16.2% of sales.
This year's survey charts a similar decline in the proportion of the total sales held by the U.S. and Europe. As in last year, 13 U.S. companies were in the Top 50, but in part hindered by a weak dollar, their share of the total was 27.9%, down from 29.3%. Results from four years ago showed U.S. producers accounting for 32.5% of the total.
The largest portion, 43.0%, was held by Europe, whose 21 companies, down from 22 in the 2006 survey, had combined sales of $208.3 billion, underpinned by strong European currencies that caused results to sparkle when translated into U.S. dollars for the C&EN survey. In last year's survey, the top European producers had a 45.1% share of the total, compared with 46.2% four years ago.
Executives from companies in the established regions are reasonably sanguine about the evolving geographic redistribution of the global chemical industry. They are not complacent, however.
BASF Chairman Jürgen Hambrecht tells C&EN: "The recent wave of consolidation in the fragmented chemical industry has given rise to many new players. Companies such as SABIC, Formosa, Ineos, and Reliance are not only grabbing the headlines but also increasing competition within the sector. We at BASF must constantly find new ways to help our customers be more successful if we are to remain one step ahead of the competition."
At Dow, Heinz Haller, executive vice president for performance plastics and chemicals, agrees with the imperative to redouble efforts to keep in tune with customers' demands. "In principle, the rise of other regions is very good," he says. "It is driven by productivity and growth, especially in China and India. We've been expecting the emergence of strong competitors in these regions."
And their emergence, Haller adds, "has pushed us to stay competitive in all our areas." The shifting of demand around the world means that the "speed of coherent decision-making and good strategy are increasingly important," he says.
MOREOVER, companies are becoming increasingly customer-oriented. Attention to customers is not new, of course, but it has come to count even more. "We are not growing by selling polyethylene on specifications; we are growing through product development, systems solutions, and so on," Haller says.
The BASF and Dow executives both point to another facet of the internationalization of the industry: the increasing degree of partnering around the world, as Western giants, for example, link up with their counterparts in places such as China and the Middle East.
"Foreign competitors are also becoming our partners," Haller notes, and in the process are opening up the opportunities for chemical producers. As he sees it, the key question for a producer is, "How can we deliver value so our customers will make money?"
The drive to serve customers efficiently and profitably is also pushing fragmentation, industry observers suggest. Companies are becoming severe in their criteria for determining which businesses are core, and they are increasingly willing to spin off businesses, even those that are an integral part of a company's history.
Although business divestments have been accelerating in recent years, they have been going on for quite a while. An analysis by BASF strategists of six of the industry's largest companies in the 1980s shows how most of them have fragmented, leaving companies more focused on smaller market segments.
Houlihan Lokey's Tyler says: "The emergence of these new players is representative of the ongoing final stages of the breakdown in the regional monopolies, DuPont and Dow in the U.S., ICI in the U.K. and former British Empire countries, and the German giants Hoechst, Bayer, and BASF in continental Europe, and also the development of emerging markets."
And specialty product sectors can make a significant contribution to companies' profitability. A case in point is the carbon fibers business of Japan's Toray Industries, which just received a boost from the launch of Boeing's carbon-fiber-heavy 787 Dreamliner airplane. Carbon fibers make up less than 10% of Toray's sales but about 25% of operating profits.
In addition, as Ineos has shown, opportunities exist for new giants willing to develop innovative business models. Tyler points out, for example, that SABIC has become more prominent as Western companies such as ICI and Hoechst have exited many commodity businesses.
Similarly, as established players sell unwanted businesses and assets, they are finding willing private equity investors. The latest example is Apollo Management, which is buying Huntsman Corp. and combining it with Hexion Specialty Chemicals. The new company will have sales of nearly $16 billion per year, a figure that would have ranked it at number 14 in this year's survey.
Apollo trumped another private investor, Access Industries, which tried to buy Huntsman through its subsidiary, the polyolefins producer Basell. Basell rebounded, however, with a $19 billion bid to acquire Lyondell Chemical. If the deal goes through, the resulting company will push into the top five of C&EN's global survey.
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