IF C&EN'S 2008 SURVEY of the Top 50 U.S. chemical producers were a car race, it would be one with an unsurprising finish. The relative positions of the chemical companies in the annual ranking changed little since last year. But the race looks like it is going to heat up. A spate of deals that are in the works or are being considered should soon leave their mark on the upper ranks of the chemical industry.
As it did last year, C&EN's 2008 ranking reveals an industry that is expanding its revenues more sharply than its profits. The 50 companies' combined sales, extracted from 2007 financial results, rose 6.0% to $309.7 billion. This growth is similar to the 6.3% increase seen in last year's survey, but it is off from the 10.9% and 23.0% gains found in 2006 and 2005, respectively.
Compiling The 50
C&EN ranks U.S. chemical producers by sales of chemicals and allied products except pharmaceuticals. Ranking the companies by chemical sales is the only way that privately held companies and some diversified producers can be included. If, for example, C&EN used market capitalization, the ranking couldn't include Dow Corning or ExxonMobil.
Because companies don't necessarily report chemical and nonchemical sales separately, nonchemical products often creep in. For instance, DuPont's agricultural and nutrition segment includes sales of seeds and agrochemicals. Monsanto, on the other hand, reports seeds and agrochemicals separately.
C&EN does not normally restate prior-year results other than to update foreign company results for current exchange rates or, occasionally, for changes in accounting procedures that otherwise would prevent year-over-year company comparisons. Neither does C&EN routinely restate prior-year rankings.
In the ranking of foreign-owned companies, C&EN uses sales administered by the firms' U.S. headquarters. These figures are as close to U.S. sales as possible, but companies don't post regional sales consistently. Shell Oil, for example, provides sales for the U.S., whereas BASF reports them for North America. A global ranking of chemical producers is scheduled to appear in the July 28 issue of C&EN.
To compile the survey, C&EN uses, for the most part, official company documents such as annual reports and 10-K filings with the Securities & Exchange Commission. For privately held and some foreign-owned companies, C&EN also interviews companies directly.
Operating profits for the 45 companies that report this figure increased only 3.3%, hitting $30.9 billion. This is similar to the 3.8% increase found in last year's survey but far below the 37.7% increase of 2006 and the 66.4% jump of 2005.
In this year's survey, all but eight companies showed a sales increase and all but 15 increased profits. Only two companies lost money: titanium dioxide maker Tronox and polyester producer Wellman. The latter company also lost money in the previous year and recently filed for bankruptcy.
Topping the ranking once again is Dow Chemical with $53.5 billion in 2007 sales, an 8.9% increase. Dow's profits, however, dropped 18.5% versus the year-ago period to $3.9 billion.
Dow's revenues are poised to change significantly in future rankings, though probably not enough to knock it from the number one position. The company is putting its polyethylene, polypropylene, polycarbonate, and ethanolamines businesses into a joint venture with Kuwait's Petrochemical Industry Co. Dow's consolidated annual sales will decline by more than $11 billion as a result of the deal, which is expected to close later this year.
PIC is paying $9.5 billion, and Dow hasn't been bashful about its desire to use the money to make an acquisition, most likely of a specialty chemical maker. In his letter to stockholders in Dow's annual report, Chief Executive Officer Andrew N. Liveris was frank about pursuing acquisitions that support his goal of strong company growth. "We will continue to pursue smaller, bolt-on acquisitions as well as medium and large transactions," he wrote. He also promised a "major step" in the firm's transformation by the end of the year.
But Liveris said Dow won't make a big acquisition for its own sake. "The fact is, we walked away from many deals that were available to us because they were overpriced and/or they did not add value," he wrote.
Dow is ahead of the second largest U.S. chemical producer, ExxonMobil Chemical, by a comfortable margin. ExxonMobil's 2007 sales were $36.8 billion, an 8.0% increase from 2006. The company's profits rose 4.1% to $4.6 billion, leaving it with the highest profits of any U.S. chemical maker. And its profits, unlike those of most of the companies surveyed, are reported after taxes.
Behind ExxonMobil is DuPont, the perennial top-ranked company before Dow's 2001 purchase of Union Carbide made Dow the largest. DuPont reported $29.2 billion in sales, a 7.2% increase. It also had a 14.2% increase in profits to $4.2 billion, the second largest in that category.
DuPont CEO Charles O. Holliday Jr. intends to keep up the pace, promising to increase earnings by 13% per year. Holliday told analysts in a conference call last month that he believes DuPont can do it by accelerating growth in emerging markets. Such markets accounted for 25% of the company's growth in the first quarter of this year. They were also a big reason that sales outside the U.S. expanded by 16% and global sales, which includes U.S. performance, increased 9% during the quarter. "We must keep posting the kind of performance that's impossible to discount," he said.
This will be the last survey for fourth-rated Lyondell Chemical, which posted $16.2 billion in sales. It was purchased by Basell in December and is now part of LyondellBasell Industries, which has headquarters in Rotterdam. With combined annual sales of nearly $45 billion, the new company will be near the top of future C&EN rankings of the global chemical industry.
This year should also be the last appearance for Huntsman Corp., currently ranked seventh with $9.7 billion in sales. It is in the midst of being purchased by number 13, Hexion Specialty Chemicals, which is backed by the private equity firm Apollo Management and posted $5.8 billion in 2007 sales. Combining these two firms will create a company likely to rank as the fourth largest U.S. chemical maker.
Only two companies dropped off the list this year. GE Plastics, ranked 13th last year, was purchased by Saudi Basic Industries Corp. and is now called SABIC Innovative Plastics. The company didn't disclose results soon enough to be included in C&EN's U.S. ranking. International Paper, number 50 in 2007, sold its Arizona Chemicals subsidiary to the private equity firm Rhone Capital, which doesn't disclose Arizona's sales.
These companies have been replaced by unsaturated polyester maker Reichhold, which is reporting its results as a private company for the first time, and metal-based chemicals maker OM Group.
C&EN'S RANKING of the U.S. operations of foreign chemical makers also holds few changes. Topping the list is BASF with $16.5 billion in North American sales, a modest increase from last year. It is followed, in the same order as last year, by Shell Oil, Total, and Bayer. ICI, number five last year, drops down to number 18 and will disappear from the ranking. It has been purchased by number 12, Akzo Nobel.
Degussa, tenth last year, drops off the list because the German company's new incarnation, Evonik Industries, didn't report U.S. results in time. Ciba Specialty Chemicals also drops off the list. They have been replaced by Formosa Plastics and South Africa's Sasol.
Recent years have seen the U.S. Top 50 influenced by private equity firms that bought chemical companies or formed new ones through serial acquisitions. Hexion, Rockwood Specialties, Celanese, Nalco, and Momentive Performance Materials have all had private equity backing.
But this trend may be abating, according to Paul de Janosi, managing director and head of Americas private equity at Celerant Consulting. He has been busy in recent years advising clients seeking acquisitions in the chemical industry; these days, however, private equity firms are on hiatus, he says. "Right now, they are somewhat on the sidelines because of the credit crunch, and they are digesting the acquisitions they have done over the past five years."
With private equity firms unable to finance large deals, chemical company values are declining. According to de Janosi, private equity's loss is a gain for chemical makers with good balance sheets such as Dow or DuPont. "Those folk that have their own ability to finance will have a significant deal-making advantage and thus will be more likely to execute strategic acquisitions," he says. Moreover, in the coming years, he expects acquirers to favor midsized companies over larger targets.
But de Janosi isn't counting private equity firms out. They are discussing deals with midsized chemical companies, he says, but are biding their time until financing again becomes available. If such purchases occur, and if companies such as Dow and Hexion complete the deals they want to complete, C&EN's next chemical scorecard might hold some surprises.