The extraordinary restructuring and debt buildup that had taken place in the Chemical industry from 2006 to 2008 has resulted in the industry going through a phase of refinancing, which is expected to drive consolidation over the next few years.
The next five years will present some interesting opportunities for chemical companies that are prepared for the new trend of refinancing and consolidation sweeping through the industry, and some serious problems for those that are not. The shale gas revolution, combined with the massive accumulation of debt stemming from mergers and acquisitions that took place during the early 2000s, has set the stage for new opportunities and inevitable consolidation in the Chemical industry over the next few years.
Restructuring and Refinancing
The period from 2006 to 2008 was a time of extraordinary restructuring within the Chemical industry. Fast forward to 2012, and a very different picture emerges. Most contracts were much smaller in scale, and two-thirds of all deals were worth less than US$1 billion. During the phase of restructuring, several companies in the industry resorted to various types of debt to finance their ventures, and now the time has come to pay up.
Over the next five years, about 25 companies are expected to pay back over US$100 billion in debt, serving as a catalyst for some significant changes in the industry. To deal with the massive accumulation of debt, the demand for financing options such as standby equities, debt-to-equity swaps, and equity injections is expected to increase. This debt refinancing is anticipated to drive further restructuring in the Chemical industry, led by investment-grade companies that have solid debt-to-equity ratios.
Shale Gas Revolution
The development and commercialization of newly accessible shale gas deposits have provided the US with cheap gas feedstock, driving the supply base west and making an investment in US companies more attractive. As the demand for chemicals continues to grow in emerging markets in Asia and the Middle East, now is the time for US companies to focus on innovation to drive profit margins, optimize product portfolios, and build financial strength ahead of the emerging trend of refinancing and restructuring.
What are the implications of a bubble in the US’s ethylene supply?
The main issue with a potential bubble in the US’s ethylene (one of the major chemicals in the industry) supply is that Europe would suddenly become significantly less attractive for debt. As US crackers become larger and more prevalent, there is the possibility of the closure of significant European naphtha crackers (anywhere from 5 to 10), and refinancing would need to take place to deal with supply and asset rationalization.
How will this affect the chemical industry in Asia?
Asian companies have played a substantial role in the Chemical industry since 2006 and have accounted for a significant fraction of global deals since then. Asia is home to many of the fastest-growing emerging markets in the industry, and as a result, global restructuring will have a profound impact on the Asian market. South Korea in particular will require substantial restructuring, and many of the smaller South Korean companies will struggle during this transitional period. The Indian industry, though relatively small, has a few large players that have achieved scale. China is on a quest to self-sufficiency – however, the country will most likely remain a net importer till at least 2020. In addition, most deals between Chinese enterprises have been relatively small compared to global deals.
Who can take advantage of new opportunities?
In the coming years, companies with strong balance sheets are poised to be the most attractive buyers and will lead the industry through this phase of consolidation. The credibility of management teams and coherent long-term strategies will be crucial for attracting funds over the next five years, and both are areas where US companies are strong. Access to low-cost feedstock, strong market positions, and industry-leading technology will all be factors that define the winners in this transition.
Looking to the Future – Chemical Industry Analysis
The Chemical industry is going through significant changes as a result of the vast accumulation of debt during the period 2006–2008. This debt is now due, and when combined with the recent shale gas revolution in the US, it presents promising opportunities for some, and potential disaster for others. Chemical companies that are in the best financial shape will have the opportunity to take advantage of this restructuring and refinancing, while smaller companies lacking access to low-cost feedstock in South Korea and Europe may suffer. Moving forward, credible management and coherent long-term strategies will be essential for acquiring funds during this period. Active buyers will likely be companies with the strongest balance sheets, access to low-cost feedstock and leading technologies, and strong market positions.