Special report: ICIS Top 100 Chemical Companies survive a challenging 2018
Beginning with some promise, 2018 became a year of nagging difficulties for most chemical companies.
The ICIS Top 100 listing of the world’s major chemical producers, ranked by sales, paints the bigger picture. Quarter by quarter, 2018 became trickier to navigate successfully. By the fourth quarter, companies were experiencing strong headwinds related to slower demand growth against the backdrop of a sharply falling oil price.
The last few months of the year were difficult, with significant pressure on product prices and weaker margins.
The leading chemical producers generated $1.2tr in sales in 2018 and the financial years in which they operate. This was a 10% increase on the equivalent 2017 figure and reflected particularly stronger price driven growth.
Upstream, the rising oil price in the second half of 2017 had helped raise liquid hydrocarbon feedstock costs which were passed down the chain to the cracker and the polymer plant.
The sharp correction in some chemical prices in 2018 reflected a much more cautious market environment, not wholly expected at the start of the year, but a situation that some had been concerned about. Prices contracted markedly for some products, leading to sharp sales declines in certain markets.
BASF’s sales for the year were up 1.7%, for example, but earnings before interest and tax (EBIT), or operating profits, were down 17% largely due to a slump in profits from the company’s chemicals division and for isocyanates and steam cracker products in particular.
Polymer producer LyondellBasell reported 2018 sales 13% higher but an operating profit for the year down 4%. Sales grew largely because of higher prices, yet net profits were also down 4%.
Chemicals and polymer markets became more challenging in the second half of the year.
Dow saw sales rise 9% for the year. Exxon Mobil chemical saw 14% increase in sales as the expansion of its chemicals production capabilities continued. The capacity build-up in ethylene chain products in the US continues. But the big oil companies are investing globally in chemicals. ExxonMobil started seven new chemical facilities between 2017 and April 2019. It had a further six projects planned by 2020 supporting what it sees as growing chemicals demand.
Clearly, companies upstream in petrochemicals and plastics were hit in the fourth quarter as the oil price slumped by 40% and customer demand fell away on destocking amid the expectation of lower prices. Some companies in Europe, including BASF and LyondellBasell, were hit by extraordinarily low water levels on the river Rhine, a vitally important waterway. Downstream market demand in automobiles weakened considerably and impacted polymer and chemical producers of all sorts.
US-CHINA TRADE WAR WEIGHS
Global economic growth slowed markedly over the course of 2018 with emerging markets softening. The US economy expanded relatively well but China growth slowed in the second half of the year.
Companies had been expecting chemicals production growth to be greater than the 2.7% recorded for the year and had not foreseen the sharp drop in output in Europe towards the year end. US producers and some in other parts of the world were impacted less by Europe’s malaise.
The threat of the US-China trade war and the weight of the credit clampdown helped subdue growth in China’s economy. China’s curbs on chemicals production due to environmental and safety concerns also crimped growth.
China is by far the largest market for chemicals with production continuing to increase. And for the first time, Sinopec leads the Top 100 ranking of chemical producers.
The average sales growth across the 119 companies in this year’s listing was certainly healthy, but the profits data - an average decline in operating profit of 8% - illustrates the margin pressure encountered by many producers and resulted from the difficult second half.
2019 PERFORMANCE UNDER PRESSURE
So far in 2019, companies have struggled to lift sales with volumes and prices under pressure from the slowdown in major end-use markets - such as automobiles - and the trade war and other pressures on industrial production. Prices, generally have tracked down with the ICIS Petrochemical Index (IPEX) for northwest Europe, for example, showing a first half 2019 decline of 13% compared with the same period of 2018.
The IPEX represents the price movements in a basket of 12 petrochemicals and polymers.
Changes in the rankings in the Top 100 reflect the shifting nature of the industry and the investments being made by some players to expand chemicals production.
SINOPEC IS NEW SALES LEADER
The rise of Sinopec is a case in point but the big US petrochemical companies produced stronger sales in 2018 as new shale gas and oil-led capacities came on-stream. There is a great deal more to come. Chevron Phillips Chemical, for instance recorded a 25% increase in sales in 2018 due in part to the recent increase in its production capacity. Also rising in the rankings is the petrochemicals business of Reliance Industries, again reflecting production capacity expansions.
Companies in the Middle East continue to expand while chemicals production growth in Asia Pacific outstrips that in most other parts of the world.
Mergers and acquisitions (M&A) activity continues to reshape the industry and is reflected in the Top 100 listing. Gone for 2018 is the merged DowDuPont with the new Dow in a firm third place among the global chemical majors. DuPont is ranked at number eight while the new company to emerge from the spinoffs, Corteva, is placed at number 58.
Also new in the table this year is the specialty chemicals producer Nouryon, sold by coatings firm AkzoNobel.
Chemicals M&A activity remains attractive to many players and the pace of deal-making showed little let-up into late 2018, with the merger between Bayer and Monsanto finalised. BASF acquired €7.6bn of Bayer assets, marking a strong move into agrochemicals.