The Challenges of M&A and the Chemical Industry

In an economy that is negatively fluctuating on a daily basis, Mergers and Acquisitions (M&A) are becoming a difficult business for most industries. And the chemical industry is one that has always partaken in M&As in order to expand their businesses and market, change their strategies, and to bring together all the segments they work within. So what news does it bear for chemical industries, when there is a crashing economy that refuses to hand-hold them through the process?

What Do the Chemical M&A Numbers Show?

Deloitte Globals’ 2019 chemical industry mergers and acquisitions outlooks had conflicting things to say, especially concerning the chemical industry in India. Although 2018 saw a 5% decline in the number of deals, the numbers are still significantly higher compared to early 2010s. Moreover, the Indian market is expected to witness chemical M&A growth led by chemicals, agro-chemicals, and construction chemicals sectors. It is the sixth largest chemical supplier in the world, and contributes to 2.1% of the GDP.

These numbers are expected to pull back further in 2019 and 2020, given the rising interest rates and slowing economic growth. But this pull back is not going to be a massive one, given that the underlying factors for chemical industry M&As continue to remain the same – specifically, “ample cash on-hand for buyers, the availability of relatively cheap credit, and the desire to increase ROI for investors,” as Dan Schweller, Deloitte Global M&A leader for the Chemicals and Specialty Materials Sectors, says.

The Currency Challenge and Market Competition

The profit margins of Indian companies are shrinking currently under a highly competitive global market, which is leading to a drop in operational capacities. The incredibly strong US dollar is exerting a downward pressure on demand for chemicals, explains Mahesh Singhi.

Another challenge has been the consolidation of the industry. For instance, the industrial gas segment remains the most segmented, with more than 85% of the market sitting with five companies. Therefore, any new entry into the market is creating massive competition – which is not necessarily a bad thing, since it also fuels a higher demand, particularly for targeted products.

The Future of Chemical Industries

Steven Jenkins, vice president and consulting at Wood Mackenzie Chemicals has a positive view of the future. “Two major trends may begin to impact industry portfolio restructuring. The first is slowing growth in transportation fuel demand. The second is an increasing focus on the circular economy, whether through recycling, regulation or substitution,” he explains. “Refiners now recognise that by 2030, up to 50 percent of growth in oil consumption will come from chemicals, and they are looking at crude-to-chemicals integration to secure future growth. This may lead to larger refiners actively seeking to grow their chemicals businesses without adding additional supply via capital investment in new plants, which means M&A becomes a preferred option to realign businesses for the future.”

Sustainability, technology, and large-scale consolidation are all becoming key to deciding how acquisitions take place. Trade rules, shifting political climates, as well as regulatory guidelines will become a major factor in deciding the direction in which chemical M&A proceeds.

A New Approach to Chemical M&A

There needs to be a flexibility in M&A structures, and how merger deals are approached. Although regulatory requirements are becoming stricter and causing a slowdown in the processing of M&As, they are also creating opportunities for companies to take an unconventional path – mainly through, carve-outs, asset sharing, asset swapping, and joint-ventures.

Flexibility is also required in order to combat the current global trade market, which is constantly in flux due to political and social situations. A more flexible supply chain, consolidating overlapping sectors, and dropping production lines that no longer fit the future strategy are all part of this.

As is opening up the doors for private-equity funds. While this definitely creates more competition, the approach to chemical M&A needs to become more aggressive in order to sustain itself. Although there is a massive shift in the M&A process for the chemical sector, the future still remains extremely bright. It is simply evolving, and the chemical industry needs to evolve with it.