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COVER STORY
Finance: Chemical Firms Have Cash To Spend But Are Wary Of Large Investments
The global chemical industry spent 2010 in a financial bunker. Although sales offices enjoyed a bump in orders starting in the second quarter, executives in finance suites continued to spend their time rebuilding balance sheets. Companies cut operating costs and capital spending, refinanced or paid off debt, and squirreled away cash, just as they did in 2009.
Fears of a double-dip recession have since abated, and chemical firms expect modest growth across almost all product lines in 2011. The credit markets have opened up, and historically strong companies can access low-cost debt again. But the mood of finance executives will stay conservative this year.
“Companies that were particularly hurt by the recession, especially the more commodity-based companies, have had to rethink the use of extreme amounts of leverage,” observes Christopher Cerimele, head of chemicals at investment bank Houlihan Lokey. Because the chemical industry is largely cyclical, most firms took a hard look at debt loads, he adds. “They have nice cash balances right now and on the whole have delivered stronger performance. But they had a big wake-up call in 2008–09,” Cerimele says.
Chemical firms with large cash piles are unsure about their plans for the money in light of the modest growth expected in chemical demand. In developed nations, production growth will average only 3.1% per year in 2011 and 2012, the American Chemistry Council predicts. In the developing world, it will grow a bit faster.
Still, Deloitte recently reported, “It is expensive and potentially value destroying for companies to remain inactive while waiting for a rebound that may be slow in coming.” Deloitte’s review of the performance of 231 chemical firms from 1998 to 2009 showed that gross margins for non-specialty chemical companies eroded. More than 60 firms did not even earn back their cost of capital during the period.
Better-performing chemical companies, according to the report, allocated resources to growing markets such as China and made strategic portfolio changes. And that’s the likely theme for investment in 2011, Cerimele says. He predicts few big mergers, but the market for small and midsized acquisitions will heat up.
For example, high-margin but cyclical businesses in the construction, automotive, and consumer products markets will be viewed as attractive buys, Cerimele expects. And firms that have products with improved environmental profiles will also be popular acquisition targets this year as new regulations take effect. Plenty of businesses will be for sale in 2011, as firms take advantage of the recovery in prices to sell noncore assets, Cerimele says.
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