I have been working in the USD 3
trillion chemical industry since the past 4 years and I have observed that this
industry has peculiar and unique things which are not generally observed in the
other sectors.
1.
Strategic Joint Ventures between competitors - The
chemical industry must be the only industry in which fierce competitors have joint
ventures extensively. (Yes, Samsung and Apple too fall into a similar category
but that is an exception).
E.g - SABIC and Exxon Mobil are strong competitors w.r.t
crude refining and petrochemicals. However, they have set up JV Al-Jubail
Petrochemical Company (KEMYA) in the middle-east to make specialty elastomers.
Three things determine
JVs in this sector:
a. Access to the RMs
b.Access to technology
c. Access to markets.
Pure economic factors come into play. Producers are even
ready to consume materials supplied by competitors if the landed price at their
premises is lower than their supplied price.
For eg:- Akzo Nobel in India uses a product called
tertbutylhydroperoxide (TBHP) manufactured in Europe by a competitor
(LyondellBessel) even though Akzo Nobel is the world’s leading manufacturer of
this product with plants in Japan, China and USA.
The only place where there can be differentiation is the
Specialty chemicals segment which makes up around 20% of the total industry.
For the bulk / commodity segment differentiation doesn’t fetch any premium.
Access to Raw Materials and ensuring supply is another major
reason for JVs. Jurong island in Singapore is one shining example where most of the large chemical companies have invested
together so as to enjoy access to raw materials easily.
In countries like India, China where technology development
is a constraint, JVs happen where a foreign company brings in technology and
the foreign company gets market access.
Thus, competitors
are strategic partners in this sector.
2.
Trader’s knowledge and contribution is most important –
To gain economies of scale, the chemical plants, especially for the bulk
commodity chemicals, are of large sizes and are concentrated at few locations
(where raw material is available). As a result, the chemical manufacturers are
heavily dependent on the traders to distribute their products worldwide. Because
the manufacturers are dependent on traders, they generally do not know much
about the local markets. The knowledge about the end user market is generally
amongst trading population. A few occasions, I have found that traders and middle-men
have better knowledge about the applications of a product as compared to the
manufacturer. A lot of middlemen are also required for regulatory approval of
the products for use in food and pharmaceutical industry. These regulations are
different in different countries.
Thus, distributors and traders play a
significant role for this sector and contribute to the growth of the sector much more when compared to other industries.
3.
Low profile & information asymmetry – The industry
is generally low profile with not much news about this sector appearing in the
news and media (other than Oil and gas). The technology barrier which causes information
asymmetry plays a major role in keeping the number of major players limited in
this field. Constant innovation and changing regulations also causes limited information
about different manufacturers and their processes to be in public domain. As a
result, consultants and market researchers play a strategic role in this
industry – much more than any other sector in my opinion. Also, because the industry
is generally B2B and understanding the products require some technical knowledge,
very limited information is generally known to general population and as a
result the industry is low profile. Since the industry is generally upstream,
the growth in chemical sector sets the pace of other downstream sectors and I
believe that chemical sector acts as an indicator for other industries.
4.
Growing and Hiving off – The chemical sector is one of the oldest
industries in the world and as such there are plants that have been in place
since a long time with managements changing over a period of time. A look at the histories of Evonik and Ineos since 1890's till today show the intensive M & A’s that have happened for a
chemical plant. Probably, consolidation is a regular characteristic of the
chemical sector. As companies grow by M&A’s, the number of products
increase and there comes a time when it is not possible for a company to
oversee all these products and so to optimize the product portfolios, some
sectors of the acquired company are hived off. Most of the M&A’s in this sector
is based on the concept of hiving off a particular business unlike other
industries complete companies are generally sold or acquired.
5. Technology and Risk – The chemical sector thrives on
innovation. New products, processes, applications are discovered continuously. Manufacturing
any major new product on a commercial scale requires setting-up a capital
intensive plant. There is always a risk that the new technology or the process
may not work on a commercial level. There have been several occasions when
technology has failed to help produce the desired product and the whole capital
expenditure had to be written off. Also, because of the race to be the first to
come up with products, there have been cases when excess capacities have been
created and the margins have been rendered to nil on many occasions. At present
such a thing is developing in USA. Because of the envisaged shale gas boom, a
lot of capital intensive plants producing ethylene & derivatives are being
developed. There shall be excess supply of these ethylene derivatives in the
future and unless new applications for these are developed, there is a risk of
the capex to fail partially or completely. Thus, risks associated with this sector are high and have huge implications.
The chemical field is such a vast and complex field that many people fail to recognize the enormity of this sector. Large chemical companies like Dow,
Exxon, BASF, Chevron, Shell, DSM, Akzo Nobel, Lyondell, Reliance, etc. have become
so huge in size and contribute so significantly to the GDPs of their respective
nations that they have a major say in the policy making.
