The U.S.chemical industry consists of 170 major companies with several of them having international operations. The products manufactured by these companies span a wide range… from chemicals used in household products like soaps and detergents to agrichemicals and specialty chemicals used in aerospace, health care, technology, telecom, and other industries. Employing over a million people and contributing substantially to exports, the annual output of the U.S.chemical industry is estimated to be around $400 billion. Chemical companies are the second largest energy consumers in the manufacturing sector.

The economically sensitive U.S.chemical industry was hit hard during the Great Recession. Industry titans like Dow Chemical (DOW) and DuPont (DD) saved billions of dollars in costs through restructuring, plant closures, and layoffs.

With costs cut to the bone and economic growth perking up, conditions are ripe for chemical company profits to ramp higher. Merger and acquisition activity is continuing at a rapid pace. Investments in chemical industry sector funds appear quite timely.

Chemical Company Profits Poised to Rise from Improving Demand and Falling Costs

The demand outlook for individual segments of the chemical industry is improving.

Agricultural Chemicals: Worldwide population growth and higher per-capita income in emerging economies are lifting commodity crop prices and driving demand for agrichemical products as farmers seek high quality seeds and greater yields. Agrichemical companies like Monsanto (MON), DuPont, Potash Corporation (POT), and Agrium (AGU) stand to benefit from these secular trends.

Polymers and Paints: The automotive industry that accounts for 10% of U.S.chemical companies’ demand has rebounded. Industry analysts are projecting global auto demand to touch 76 million units, with China accounting for 18 million units and the U.S., 13 million units. Dow Chemical, BASF Corp. (BASFY.PK) and PPG Industries (PPG) stand to benefit from increased demand for plastics and coating materials used in automobiles.

Building Materials: The U.S.home building sector is a major consumer of chemicals. Off late, the U.S.housing industry is showing some signs of improvement. The National Association of Home Builders expects annual housing starts of single-family homes to rise 21% to touch 575,000 units in 2011. Building products manufacturer U.S. Gypsum (USG), roofing products manufacturer Owens Corning (OC), and paint manufacturers Sherwin Williams (SHW) & Valspar (VAL) can fare well if the NAHB’s expectations come true.

Against the backdrop of rising product demand, chemical company profits are receiving a boost from low natural gas prices since the commodity is used as a feedstock and an energy source. Natural gas prices have not recovered after the Great Recession due to abundant supplies. Gas prices are nearly 50% lower than where they were in July 2008.

Mergers & Acquisitions Appears Set to Continue at a Good Clip

Chemical companies have been active in M&A for some time. Dow Chemical acquired Rohm & Haas for $15.3 billion in March 2009 to expand its specialty chemical line. CF Industries (CF) bought Terra Industries in April 2010 for $4.7 billion to strengthen its position as a global fertilizer company. Eyeing growth in emerging Asian economies, Agrium purchased Australia’s AWB Ltd in December 2010.

Recently, DuPont has offered to buy Denmark’s Danisco for $5.8 billion to expand into biofuels and food enzymes. Air Products & Chemicals (APD) ended its attempt to take over Airgas (ARG) only after the latter succeeded in getting court approval of its poison pill provision.

Auguring well for continued M&A activity, many of the chemical companies carry hoards of cash on their balance sheets and view acquisitions as a way to grow their businesses.

In sum, chemical companies have a lot going for them and possibility of takeovers adds to investment appeal. Sector rotation practitioners can find interesting opportunities among chemical industry investments.

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Latest reports released on Nov 13 from Bloomberg show Italy has emerged from recession and GDP grew by 0.6 percent. The recovery of Germany and France, the country’s largest export markets, also sounded a note of optimism.

Mechanical machinery and equipment
Italy’s engineering sector, covering mechanical machinery and equipment, is now the second largest in the EU and fast catching up with leading manufacturer Germany. It produced 18.7% of machinery in the EU in 2008 and also made significant gains in Russia, Africa and South America.

The sector is dominated by small, family-owned businesses, with the average size of workforce being around 13 people, which is the lowest in Europe. There are over 41,000 manufacturing and engineering companies in Italy and while some claim the sector’s strength lies in the very personal and ‘small is beautiful’ approach of a family business, others claim that this is a risky strategy as old-fashioned attitudes and family loyalties may impede progress in a global market.

Italy’s growing success in the sector has been through focussing on its strengths – quality of design and steady output of mid-range engineering products from small, flexible companies with their sites firmly set on the world markets.

Basic metals and fabricated metal products
Considering Italy has very few mineral resources and has to import most of its raw material, its metal industry is a large and important one in the nation’s economy, particularly regarding exports. Half of the country’s iron output comes from the Isola d’Elba off the coast of Tuscany.

Italy has 50,000 businesses and 850,000 workers in the metal industry, the majority in the north. In the iron and steel industry many of the large companies are in the centre and south of the country.

Transport equipment
Italy’s automobile industry is the country’s largest employer with an estimated (2004) 196,000 employees. The automobile sector is dominated by Fiat which ranks number ten in the world’s top motor vehicle manufacturing companies, although as a country Italy ranks only 17th in terms of motor vehicle producing countries. Fiat went into partnership with US auto manufacturer Chrysler in May 2009, a clear indication that is now seeking to conquer international markets after its dominance of the domestic one. It also intends to bring the Alfa Romeo back to the US market. The company posted its highest ever profits in the last quarter of 2008, defying the global downturn. As well as production and export of iconic luxury brands like Lamborghini, Ferrari and Maserati, the transport export sector also includes city cars, passenger vehicles, transport vehicles, trailers, and auto parts and accessories.

The government’s introduction of incentives to trade in older cars for more energy efficient ones has resulted in new car registrations rising by 16% in October.

Chemical products and synthetic fibres
This is a crucial sector for Italy With a turnover of 57 billion euros it is the fourth largest chemical producer in the EU. There are three thousand companies in the sector employing around 126,000 people.

Of the 200 or so industrial districts in Italy, almost all have some connection with the chemical industry. The main concentration of Italy’s chemical business is in the north of the country, which accounts for 68% of the chemical companies. Lombardy (Lombardia) alone accounts for almost half of that percentage and is the top region in Europe in terms of number of companies in the chemical industry and second largest region in terms of employees.

Italian association Fedechimica conducted a recent survey on why foreign companies appreciated doing business with the Italian chemical industry and the top factors included: the quality of human resources, the market size and quality of customers, the quality and reliability of equipment suppliers and the quality of R&D.

The spread of ownership in the Italian chemical industry is 41% Italian SMEs, 23% medium and large Italian companies and 36% foreign companies.

In June 2009 Italian oil and gas group ENI announced it was investing 700 million euros in the industry between 2009 and 2012.

Electrical Equipment, Electrical, Electronic and Optical Apparatus
Estimates put the value of the global electronics market at $2 trillion per year, $275 billion of that is on semiconductors. The sector has suffered from the global economic crisis, but analyst firm Gartner reported in October 2009 that the industry is showing signs of recovery, although this will not stabilise until 2010, with mobile phones expected to lead the recovery.

Italy’s electronics industry suffered a decline at the end of 2008 and the first quarter of 2009, but a recent report by the ISAE (Istituto di Studi e Analisi Economica) on how the industry itself felt about recovery showed that companies in the centre and south of Italy felt more optimistic about the future. This was probably because they were less affected by the international market while the larger companies in the north west and north east had been harder hit and so were more cautious. That said, the signs of recovery are more widespread in the north.

Another report from the Servizio Studi e Ricerche di Intesa Sanpaolo focussed on the vital role of human resources in the electronics industry. The sector employs 6.8% of Italy’s manufacturing workforce and has the highest percentage of workers in the EU The sector has seen a 10% rise in the number of highly skilled white collar workers in the last ten years from 20% in 1997 to 30% in 2007, higher than other manufacturing industries. Add to this the high percentage of high sklilled blue collar workers and the electronics industry in Italy has one of the most highly skilled workforces in Europe, with the exception of Garmany.

Italy continues to invest in renewable energy and this, combined with the government’s aim to invest in the south of the country has led to some interesting developments. Northern Italian photovoltaic and solar power plant construction company Enerqos plc of Milan, has a one billion euro contract with NextEnergy Capital and is building four solar in Puglia, in the heel of Italy’s boot. The company also has a licence for projects in Sicily.

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India has achieved considerable progress in production of chemicals. And with slash in tariffs, Indian chemical companies with well-built systems and structured operations are likely to be benefited further.

It is not only country’s oldest industry, but the Indian Chemical Industry has been contributing to India’s growing economy in a phenomenal way. It may be hard to believe, but the industry serves the basic need of many different industry verticals like natural gas, water, oil, metals, minerals, air, oil, etc and all these verticals eventually bring into marketplace an array of products, almost 70000 products, to be precise.

Today, India has achieved considerable progress in production of basic organic and inorganic chemicals, pesticides, paints, dyestuffs and intermediates, petrochemicals, fine and specialty chemicals and toiletry product segments. And with slash in tariffs, Indian chemical companies with well-built systems and structured operations are likely to be benefited further. The companies manufacturing highly valued chemicals, and who are compliant of industrial quality standards, can make their mark not just in India but even in the overseas markets as well.

In Indian context, the rise in disposable income has led to improved chemical consumption. This has aided country’s GDP climb further, from 9% to 13%. In an attempt to make the industry more progressive and flourishing, the government of India has introduced a slew of policies and special economic zones centering on the petrochemical sector. Furthermore, several manufacturing companies are focusing on expansion plans in the coming years.

Chemicals and chemical products influence our lives in a significant way. Be it donning synthetic clothes, or consuming drugs, or when it comes to using thermoplastic furniture at homes and offices, chemicals have become a way of life in this fast-changing world. In addition, the industry plays a pivotal role in agricultural and development sectors. Some of the other sectors, like engineering, automotive, consumer durables and food processing also depend on this sector in a big way.

The industry is on a high growth trajectory. The industry, through a series of efforts is expected to achieve USD 100 billion in the upcoming years. The industry’s contribution to the Indian manufacturing sector is almost 17.6 percent. Since the ages, Indian chemicals have been traded and today imports stand at USD 7.92 billion and exports at 5.95 billion. And now with the onset of liberalization and globalization, the Industry is on a major expansion spree. The industry today is into manufacturing wide range of goods including fine and specialty chemicals, drugs and pharmaceuticals, dyes and pigments, agrochemicals and fertilizers, pesticides, plastics and petrochemicals etc.

However, Indian chemical industry is yet to makes its presence felt in a big way in the international markets.

Fast-facts on Indian chemical industry

o Highly fragmented

o Operates at the micro level.

o Increased per capita consumption level has put the industry on fast-track

o Higher cost of capital, import duties and power, making it less competitive in the international markets.

o Very little spotlight on Resource & Development

o Presence of many multinational companies

o Big players in bulk chemicals. Presence of small and big players in fine and specialty chemicals.

Major Segments

The Indian Chemical Industry has following major segments:

* Petrochemicals

* Inorganic Chemicals

* Organic Chemicals

* Fine and specialties

* Bulk Drugs

* Agrochemicals

* Paints and Dyes

Petrochemicals

Petrochemicals form the biggest category in the chemicals, and it is also one of the fastest growing sectors. The segement is into producing basic chemicals like Ethylene, Propylene, Benzene and Xylene etc, intermediates like MEG, PAN and LAB etc., synthetic fibres like Nylon, PSF and PFY etc, polymers like LDPE/HDPE, PVC, Polyester and PET etc, synthetic rubber like SBR, PBR etc. The key players include: Reliance, IPCL, NOCIL, Haldia and GAIL etc.

Inorganic Chemicals

At present it is worth US$ 2.5 Billion industry. The segment concentrates on the production of caustic, chlorine, sulphuric Acid etc. The inorganic chemicals are commonly used in detergents, glass, soap, fertiliser, alkalies etc. However, the industry is encountering stiff competition from international players, when it comes to catering to the requirements of the local markets.

Organic Chemicals

It is reportedly 1billion dollar industry and includes an array of chemicals. Most of the companies manufacturing organic chemicals can be found in western India.

Fine Specialties

The fine specialties segment is highly fragmented, with sizeable number of big players. However, all these players operate on low volume and high price margin. It is one of the fastest growing sectors with market around US$80 million p.a. And many big and small Indian companies form part of it. The major end user segments include: Textile, Leather, paper, detergent, rubber, paints, polyester, oil and gas etc.

Bulk Drugs

Bulk Drugs have a large market in India and in the outside world. Out of the 475 drugs used, 425 are locally procured. There are around 350 units in the organized sector, while there can be many more in the unorganized sector. Bulk drug production is concentrated in the areas around Bombay, Ankleshwar, Hyderabad – Madras, Chandigarh.

India has very strong base in reverse engineering, molecular chemistry and patents on processes and not just on products. Major players in India in bulk drug category include: Ranbaxy, Dr. Reddy’s, Cheminor, Shasun, Cipla, Lupin, IPCA, Sun, Aurobindo, Kopran, Cadilla, Wockhardt, etc. It is a well-acknowledged fact that most of the bulk drug companies are Indian companies while those into formulations are primarily MNCs.

Agrochemicals

India being an agricultural dominated country, it is obvious that the country is a major user of agrochemicals; nonetheless, the average Indian consumption is reportedly low i.e., 1/20th of world average. The segment has been witnessing a growth of 10% pa and has registered revenue worth US$800 million. Consumption of the crop varies depending on the crop and region. Cash crops like sugarcane, tobacco etc. consume large amount of pesticides, almost over 60%. Major agrochemicals exports include: Insecticides, Fungicides, Herbicides, Weedicides, Rodenticides, and Fumigants.

Paint and Dyes

Indian dyes are in demand world over, thanks to ban on production of dyes in developed nations due to the reservations related to pollution. Dyes are principally used in Paints, Inks, Textiles and Polymers. The total market of paint and dyes is almost US$ 1 Billion, and the growth rate is almost 12%. In addition, the marketplace is highly fragmented. There are about 25 large and medium players, which cover 50% market share, while 2000 other organized players contribute next fifty percent. Moreover, the per capita consumption is very low in India(400 gms) as opposed to the developed countries(15 kgs).

Overseas Trade

In the early 1990s, India was more into importing of chemicals; however, with the setting up of large scale petrochemical plants like Reliance, etc exports have improved. Even exports of bulk drugs, pharma, pesticides, dyes and intermediates have climbed up.

The overall performance of Indian Chemical Industry has been good in the domestic markets; however, in the international markets the industry it is yet to make its presence felt in a significant way. And factors like recession and crises in the Middle East have had a poor impact on the manufacturing and export sector of the industry.

The International Council of Chemical Associations (ICCA), an association that consists 80% of the world manufacturers of chemicals has announced its support for a new round of multilateral trade negotiations in the World Trade Organization.

ICCA’s main concerns include: removal of chemical tariffs, management of anti-dumping practices, making simpler the custom processes and full execution of TRIPs agreement. While management of anti- dumping practices would profit India, the tariff-free world would lead to stiff competition

Road ahead

Highly developed technology, in-depth research capabilities, backward and forward linkages, development of domestic capacity to decrease the dependence on imports are some of the crucial factors that need to be taken into consideration. Nowadays, safety, health and environment protection issues have become the major-talking point in almost all industries and even in the Indian chemical industry too. The Indian chemical manufacturers are addressing the issue on a war-footing.

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