Issue Date: July 28, 2008
Global Top 50
Compared with the narrow edge that BASF had over Dow last year, the German giant holds comfortable sway over this year's Top 50, which ranks companies according to worldwide chemical sales. That gap aside, whereas a handful of global giants used to dominate the Top 50 survey, this year, there is no longer a clear delineation of a top tier followed by "everybody else." Companies seem more evenly distributed, from BASF's sales of more than $65 billion to those of Celanese, the last company in the list, with sales of $6.4 billion. Last year's cutoff, in contrast, was the less than $6 billion rung up by then-newcomer Braskem.
Accompanying a rise in the aggregate sales of the Top 50 was a strengthening of the companies' profitability, despite the ferocious increase in costs for feedstocks and energy. The aggregate operating profit margin in this year's survey, which is based on 2007 financial results, was 10.4%, up from 9.5% in the previous ranking.
Petrochemical and commodity-heavy producers, which felt the most immediate impact from rising raw material costs, were among those that reacted rapidly to rising costs. Through aggressive action, they were able to pass along the higher costs to customers and even bolster their profit margins. For the first time in 10 years, none of the companies in the ranking posted an operating loss.
In light of higher oil and gas prices, companies are looking ahead two to four years and reconsidering their strategies, says Marcus Huebel, a partner focusing on chemicals and natural resources at the consulting firm Accenture.
But more immediately, he adds, "they are reacting more quickly to the pressing need to pass on higher oil prices. Margin management is of primary importance. U.S.-headquartered companies have executed swift price increases of the kind that we have not seen earlier."
The roster of companies in the ranking is remarkably stable compared with last year. The only newcomer is Japan's Showa Denko, in the number 49 slot, but this is a case of a big player returning after an absence of a few years. Swiss specialty chemical maker Ciba dropped off; its sales of $5.4 billion proved insufficient to maintain a place in the Top 50. And in contrast to previous rankings, there were no corporate spin-offs of chemical businesses sizable enough to claim a spot among the Top 50 this year.
Two companies on the list, ICI and Lyondell Chemical, won't appear in next year's ranking. Each has been acquired by a larger company on the list ICI by the Dutch paint and chemicals company AkzoNobel, and Lyondell by the Dutch polymers maker Basell.
The disappearance of ICI—for many years one of the top five chemical companies worldwide—is particularly illustrative of what Anthony Cox, a managing director at the consulting firm Trumont International, calls "the glaring management mistakes" that have shaped the chemical industry during the past decade.
"ICI was a case study in how not to manage the evolution of a chemical company," says Cox, who worked for ICI more than 20 years ago and subsequently became a chemicals analyst in the London financial community. "ICI tried too hard to follow the stock market short-term fashions," he says, leaving it vulnerable to takeover by a more stable company.
Cox recalls being at a presentation where AkzoNobel's chief executive officer said his company couldn't sustain its three disparate businesses in pharmaceuticals, coatings, and chemicals. "It was obvious they would get rid of one company, and most of us were speculating that the company would stay with pharma and paint," he says. Instead, the firm decided it did not have the resources to compete effectively in pharmaceuticals. The sale of that business, to Schering-Plough, opened the way to acquire ICI for its coatings business.
The impact of the ICI and Lyondell acquisitions will not be felt until next year's ranking. Meanwhile, this year's ranking spotlights the increasing importance of chemical companies owned by private equity firms.
Probably the most dramatic case is Ineos, which sprang from nowhere in the late 1990s with the backing of private equity capital. Founder Jim Ratcliffe, formerly a chemical engineer with Exxon's U.K. subsidiary, has led a string of buying-and-selling deals to build the company. His specialty is buying assets dismissed by other companies as "noncore" and knitting them together into world-leading businesses. Ineos has bought businesses from ICI, Degussa, Dow, Rhodia, BASF, Chevron Phillips, BP, and Borealis; its most recent deal was this spring's $1 billion acquisition of Norsk Hydro's polymers business.
The ranking contains other private-equity-owned companies as well. That is not surprising: According to the tax and advisory services firm PricewaterhouseCoopers, private equity firms were involved in four of the top 10 deals in 2007 and in 28% of the overall transactions in the first half of the year.
For example, Basell, which acquired Lyondell Chemical late last year, is owned by the private company Access Industries. And Hexion Specialty Chemicals, owned by the private equity firm Apollo Management, agreed last year to acquire Huntsman Corp., although Hexion and Apollo are now famously trying to get out of that deal.
"I think private equity companies have acted as a spur to greater returns and efficiency by the established companies," Cox argues. "But the private equity firms have probably lost their edge now because of the credit crunch. They never could match the synergy potential of trade buyers, and now banks won't lend them as much, so they can't compete easily with well-heeled firms like BASF. Also, sellers are learning to look closely at the strength of their claimed financing arrangements." Indeed, PricewaterhouseCoopers reports that private equity firms' involvement in chemical deals dropped to 17% of all deals in the second half of 2007.
The geographic makeup of sales, as in last year's rankings, shows a continuing growth in companies outside the traditional chemical-producing regions of the U.S., Western Europe, and Japan.
IN LAST YEAR'S survey, combined sales at these "rest of the world" companies surpassed for the first time the share of sales held by Japanese firms. This year, these same firms consolidated their position to account for 17.9% of total sales, up from 16.2% in the 2007 ranking.
Thirteen U.S. companies were in last year's Top 50, with 25.2% of total sales. This year, only 12 U.S. companies appear, and they account for 25.5% of sales. Eight Japanese companies make this year's list, accounting for 11.8% of total sales; in the 2007 ranking, there were seven, with 11.9% of sales.
The number of European companies present in the ranking has held steady at 21, but the sales share they hold rose to 45.1% from 43.0% in the 2007 ranking. European companies are basking in the strength of the euro, the common currency of 15 of the 27 European Union countries. Although the companies suffer when sales outside Europe are remitted home and translated into the euro, the reverse procedure—translating corporate sales into dollars for C&EN's ranking—gives companies a significant boost up the list and increases their share of total sales.
The increasing share of chemical sales now held by "rest of the world" producers comes as no surprise, Accenture's Huebel says. "It's a reflection of the globalization going on in what we see as a multipolar world."
The chemical industry's globalization, he says, is "certainly driven by infrastructure, information, and communications technology, as well as the ability to move goods around the globe." Companies go global to get closer to natural resources, he adds, and to consumers, especially those in developing economies.
Some companies, Huebel points out, are forging closer relationships with resource-rich national oil and gas companies—in the Middle East, for example, but also ones in northern Africa and parts of China. For other companies, Huebel says, the strategies "feature efforts to come closer to the consumer markets. They are building manufacturing assets closer to them."
Compared with competitors in the developing world, Western companies still have an edge in innovation and customer relationships, according to Trumont's Cox. Asian firms, he says, "can compete with very cheap manpower—in many areas, where production costs are the main factor, they can outcompete anybody."
That's important for selling to some of the big chemical-consuming industries that have relocated to Asia-Pacific; the leather and textile industries are two vivid examples.
"Where you don't really need close customer contacts and service application skills, the Asian companies are competing strongly," Cox says. "But where marketing, close customer contact, and application skills are most important, they are finding it difficult to compete."
Western companies cannot afford to rest complacently, however. As Huebel points out, the newer companies—particularly those funded by private equity and sovereign wealth funds—are beginning to add research and technology to their existing investments in production and infrastructure.
Far from leaving innovative new products and specialties to established multinationals, the newer giants are putting on record their ambitions to compete in innovative new products and in commodities.
Companies such as Saudi Basic Industries Corp. (SABIC) have begun emphasizing product specialization. Sometimes they find the opportunity to acquire specialization, as in SABIC's purchase of GE Plastics, now known as SABIC Innovative Plastics. The buy gave SABIC seven of what GE had called Centers of Excellence around the world that reinforce the Saudi company's existing research and technology resources.
"SABIC this year continued to build its intellectual property; we now have nearly 5,700 patents," CEO Mohamed H. Al-Mady said in his company's 2007 annual report.
On the other hand, long-term investments by the global Top 50 show a contradictory trend. For those companies reporting the data, capital spending as a percentage of chemical sales rose significantly in 2007, but R&D spending as a percentage of sales dropped to a record low for all the years that C&EN has surveyed the top companies. That cannot be good news for the health of the global chemical industry—no matter where it is located.
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