In an economic environment with negative fluctuations every day, mergers and acquisitions are difficult for most industries. The chemical industry is also often involved in mergers and acquisitions in order to expand its business and market, change its strategy, and integrate its various departments. So, when the economy collapses and refuses to control the chemical industry in the whole process, what is the impact on the chemical industry?
What does the M & a data of chemical companies show?
Deloitte globals has conflicting views on the prospect of M & A in the chemical industry in 2019, especially in India. Although the number of transactions decreased by 5% in 2018, it still increased significantly compared with the beginning of 2010. In addition, the Indian market is expected to witness the growth of chemical M & A led by the chemical, agricultural and construction chemicals industries. China is the sixth largest supplier of chemicals in the world, accounting for 2.1% of GDP.
Given rising interest rates and slowing economic growth, these figures are expected to fall further in 2019 and 2020. But this pullback will not be a huge one, given that the potential factors for M & A in the chemical industry continue to remain unchanged, specifically, “ample cash, exhibitor buyers, availability of relatively cheap credit, desire for investors and increased ROI,” said Dan Lianlian, Deloitte’s global M & a leader in chemicals and specialty materials.
Currency challenge and market competition
In the highly competitive global market, Indian companies’ profit margins are shrinking, leading to a decline in operating capacity. Mahesh singhi explained that an incredibly strong dollar was putting downward pressure on demand for chemicals.
Another challenge is industry consolidation. For example, the industrial gas market is still the most segmented, with more than 85% of the market occupied by five companies. Therefore, any new market is creating huge competition – which is not necessarily a bad thing, because it will also stimulate higher demand, especially for the target products.
The future of chemical industry
Steven Jenkins, vice president and consultant of wood Mackenzie chemicals, has a positive outlook on the future. “Two major trends may start to affect the restructuring of the industry portfolio. The first is a slowdown in the growth of transport fuel demand. The second is the growing focus on circular economy, whether through recycling, regulation or substitution, “he explained. “Refiners now recognize that up to 50% of the growth in oil consumption will come from chemicals by 2030, and they are considering the integration of crude oil and chemicals to ensure future growth. This may lead large refiners to actively seek to expand their chemicals business rather than increase additional supply through capital investment in new plants, which means that M & A will be the preferred option for future restructuring business. “
Sustainability, technology and large-scale integration are key factors in deciding how to make acquisitions. Trade rules, changing political climate and regulatory guidelines will become the main factors determining the development direction of M & A of chemical companies.
A new way to merge chemical companies
M & a structure and M & a transaction mode need to be flexible. While regulatory requirements are becoming more stringent and leading to a slowdown in M & A, they also create opportunities for companies to take an unconventional path – mainly through spin offs, asset sharing, asset swaps and joint ventures.
Flexibility is also needed to deal with the current global trading market, which is changing due to the political and social situation. A more flexible supply chain, the integration of overlapping sectors, and the reduction of production lines no longer in line with the future strategy are all components of this strategy.
It’s like opening the door to private equity. Although this will undoubtedly bring more competition, in order to maintain its own survival, the M & a mode of chemical industry needs to become more radical. Although great changes have taken place in the M & a process of the chemical industry, the future is still very bright. It’s just evolving, and the chemical industry needs to evolve with it.