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In a nutshell, or should I say in a stainless steel tote tank, the future of the chemicals industry in 2015 looks exciting. The conditions for buying companies and merging businesses in the sector are good, and they continue to build on the steady increase in activity over the last two years. Corporate balance sheets are generally strong, and both strategic and private equity buyers are seeking opportunities to acquire new firms, encouraged by low interest rates and growing world demand.

As Peter Young, president of investment bank Young & Partners says,“The strong Mergers and Acquisitions (M&A) market in 2014 … will continue into 2015. Pent-up demand for growth and the build-up of cash have been and will be drivers for demand for strategic buyers. While available low-cost debt financing and unused funds will continue to drive deal demand for financial buyers.”

In 2014 alone, there were almost $40bn worth of deals, including almost 90 deals worth over $25m each. This represented an 8% increase in the number of transactions in the first three quarters of 2014 compared to the same period the year before, a situation that doesn’t look like changing.

As Bernd Schneider, managing director and head of chemicals at investment bank N+1 says, “We expect the healthy chemical M&A momentum to continue in 2015. The overall environment of high liquidity and available financing on the one side and both strategic and financial investors’ appetite to invest … are here to stay,”

Mario Toukan, managing director and head of chemicals investment banking at KeyBanc Capital Markets, is also upbeat, believing that the first quarter of 2015 could be “flush with new deals”.

So things are hotting up and they don’t look like cooling in the coming months, but why?

Why should we expect more deals?

Telly Zachariades, a partner at The Valence Group investment bank, helps explain. “A number of factors are conspiring to make this M&A market unusually buoyant. Companies are continuing to be active in restructuring their portfolios, sometimes of their free will and sometimes under pressure from activist investors. Activist investors usually act as a catalyst to accelerate or encourage restructuring, which often leads to M&A activity.”

This includes an increase in investor activity that is targeting the chemicals sector, particularly in the US. This is evident in recent asset sales, where several big companies have been part of sell offs and trades including DuPont, Ashland, Dow Chemical, American Pacific, Ferro, Air Products, Calgon Carbon, MeadWestvaco (a packaging company with a specialty chemicals operation), Innophos and OMNOVA Solutions.

Dow, for example, is solidifying its chlor-alkali and derivatives businesses, by increasing its divestiture target to $7bn-8.5bn by the middle of 2016. Whilst in December 2014, it agreed to sell Angus Chemicals, an additives and intermediates producer to private equity firm Golden Gate Capital for $1.2bn. It also sold its sodium borohydride business to Vertellus Specialty Materials, whilst its polyolefin films plant in Ohio, was part of a $225m deal with Valgroup Packaging Solutions.

DuPont, meanwhile, is rumoured to be planning to spin-off its performance chemicals segment, including the world’s largest titanium dioxide (TiO2) business before the end of the year.

Ashland completed the sale of its elastomers business to Lion Copolymer in December 2014. While OMNOVA Solutions is said to be in the sights of investor Barington Capital, which is pushing for the sale of the company’s engineered surfaces segment (decorative components, functional surfaces for buildings and automotive).

Deals like this become understandable when you begin to see them through the eyes of an investment specialist. As Zachariades makes clear, “Chemical companies are relatively easy targets when it comes to activists. You can easily look at a company with multiple divisions of which not all will be #1 or #2 in their field, or which are more cyclical or more commodity or have low growth. Then the question becomes: Why remain in these businesses? The answer is usually not so simple. But rest assured – we’ll continue to see more of this dealing activity in 2015.”

But what makes the current business climate for mergers and acquisitions so interesting is that there is a double storm, with corporations, as well as investors, taking an interest in buying up chemical firms.

“For corporates, the main question is: How do we grow? The global chemical market grew at just 2% over the past 12 months,” said KeyBanc’s Toukan. “CEOs are focused on whether they can build out a new business that can grow faster than GDP.”

Bernd Schneider, of investment bank N+1 agrees that corporates are looking to buy, but sees other reasons and some more specialized areas for growth. He believes that, “Higher growth opportunities outside Europe are expected to continue urging owners of maturing businesses to reconsider their portfolio strategy and make use of attractive valuation levels. However, buyers are increasingly picky, so the valuation gap between attractive businesses directly addressing the mega trends – food and feed ingredients, functional food, etc – and more mature ones such as standard textile or leather chemicals, commodity polymers/fibres has the potential to widen.”

What might stop mergers from happening?

Certainly there are some factors that might affect the number of deals that happen in the coming months, not least of which is the uncertainty of global politics in Ukraine, Russia, Southern Sudan and North Africa, Thailand and Turkey.

The European economy still holds areas of weak or stagnant growth, and oil prices continue to cause hesitancy among investors. That said, the decline in oil prices, while compressing margins at certain petrochemical companies, particularly those in the US, may have a net positive impact on M&A, as European and Asian producers become more price competitive.

“The biggest single risk out there is interest rates going up. That would reduce the amount of leverage you can put on an asset, as well as increase the cost,” said The Valence Group’s Zachariades. “The competitiveness of private equity players is very much dependent on the cost of debt. Private equity firms won about 50% of the asset auctions in 2014 versus corporates.”

The debt financing market has been strong for many years, but it too moves in an economic cycle, meaning that at some point in the future it will soften and interest rates will rise. Investors and CEO’s know this, and may well decide to act, and buy now, rather than wait for the cycle to end.

Private equity firms have always been major players in M&A, and they will continue to be in the foreseeable future. As Young from Young & Partners says, “They accounted for 25% of the total number of deals completed and 29% of the dollar value ($9.3bn) in the first three quarters of 2014. This is an increase from the pace earlier in 2014 and 2013 and will continue in 2015. They have a lot of money to invest and the chemical industry has become a popular sector.”

This is a belief supported by Toukan from KeyBanc, he notes how some private equity firms “have really defined themselves in chemicals. Arsenal, SK Capital, CCMP, American Securities and HIG – have been buying all the businesses. They’ve built a lot of expertise over the years in chemicals and are winning against sector agnostic funds.”

Another appeal of the chemicals industry for many investors is how streamlined it is. During the financial crisis, many firms went out of business, so only the profitable remain. A point outlined by John Beagle, managing director and co-founder of Grace Matthews investment bank, “The quality of assets is very high. The pressures on the chemical industry over the last 10 years have made companies better. If they’re not good, they don’t exist anymore. (So) it’s a good time to be a seller. Sponsors are still challenged to find assets at a reasonable price.”

So what sectors are investors looking at?

Opinion is divided on where the next big deal will come from, but Beagle from Grace Matthews has some names to share.

“The benefit of scale in formulated chemistry has never been greater with the ability of large companies such as PPG industries, Sherwin-Williams and AkzoNobel to leverage technologies, supply chains and brands.”

Chemical companies with business in attractive end markets such as construction are gaining interest, as well as niche businesses such as food ingredients, will be a hot sector according to KeyBanc’s Toukan.

Meanwhile, N+1’s Schneider said, “We expect particularly high momentum in food/feed additives, lightweight materials based on glass or carbon fibre composites, and coatings. The consolidation in certain chemical sub-industries such as construction chemicals where consolidation can additionally pick up momentum (with St Gobain’s recently announced intention to acquire Sika, or agro and pharma oriented fine chemicals) should continue throughout 2015.”

This is a good time to be in the chemicals industry. The world economy is going from strength to strength, so there is good business to be made for both employees and employers. But with an increasing amount of money chasing acquisitions in 2015, it is a seller’s market. So if you are a chemicals business owner who is considering selling then, as John Beagle with Grace Matthews said,” this would be the time.”

All good business people know that an inventory strategy should always focus on keeping costs low, keeping customers satisfied and having access to more product easily, should the need arise.

Time spent on constructing a master business strategy is wasted if you do not convert it into profitable results, and all too often the weak link is in the supply chain.

So with this in mind, please take a look at our top tips for managing logistics.

Inventory control

Always keep in mind the 80/20 rule. This idea was first founded by the Italian economist Vilfredo Pareto, and states that typically 80% of your output comes from 20% of your input, your core business. This means that you need to stay on top of what’s selling best to best manage inventory.

Concentrate on making your top selling products work effectively for you, ensuring that you have sufficient in hand to deal with unforeseen circumstances. Calculate the amount of product you have in terms of weeks of sales, and pre-think contingency plans for surprise orders ahead of time.

Keep a bare minimum of stock for your slow moving products, as investing heavily in these ties up space, cash and manpower. If you already know that you have too much of a certain material then be prepared to cut your losses now. Create a plan to get the stock off your hands by selling at sale price.

Relationships

Develop relationships with suppliers so you can work together for mutual gains. This forms a key part of looking after your inventory control, as sharing the oversight of supplies of high movers can avoid shortages that will damage your main flow of income.

See your suppliers as business partners, so that they can share ideas on consumer trends and advise you ahead of time of third party problems or outside influences.

Tighter bonding with suppliers can enable you to set up tracking systems, measure accuracy rates, offer performance based incentive schemes and foster greater understanding so that they understand the level of accuracy and speed that you demand.

Having a closer relationship with your suppliers will also allow you to have a better understanding of their position, giving you bargaining power

Measure

Inadequate performance measurement is a surefire way to not knowing what is going on. One of the biggest factors with logistics is that by nature everything is far away, unlike site management, so without effectively measuring results of where things are and when, you have no way to track the success of this vital part of the operation.

This makes improving the system impossible.

A good example of a lack of effective measurement happened in 1988, when the US Navy ran one of the most expensive projects of all time to improve supply chain operations. Later analysis by the Government Accountability Office (GOA) noted that there was “no marked improvement in the Navy’s day-to-day operations”.

This was largely due to the fact that any change would have been impossible to measure. There were no metrics in place to allow any before and after comparison.

Organisations must identify the critical information they need, in order to know how well their supply chain is doing. There is a balance to be found between too little data and too much, so KPIs or key performance indicators should represent the happy medium.
These ‘measuring sticks’ are a handful of metrics that cover what an enterprise really needs to know: no more and no less. The challenge is to pick the right indicators, as KPIs should be motivating, inspiring and achievable. So choose KPIs which employees can understand and see the relevance of.

Similarly choose KPIs which employees can affect and know how to affect them, and this will help ensure that they are monitored and reported consciously.

Other metrics can include the following:  Cycle time metrics (e.g., production cycle time and cash-to-cash cycle); Cost metrics (e.g. cost per shipment or cost per warehouse pick) and Service metrics (delivery in full and on time).

Invest in People

In some organisations staff cannot accomplish supply chain tasks properly for lack of training and their knowledge gaps have a known, negative impact on productivity and profitability.
To avoid this, your business needs a long term vision for investing in people. Especially in a world where supply chain performance can make a major competitive difference.
Frequently, the logistics team is not seen as central to the success of the company. A chemicals trading company invests wisely in recruiting and training the best chemical engineers, salesmen and IT support, but does not focus fully on delivery to customers.

A company that does not invest in making working conditions, training opportunities and career prospects appealing for its supply chain roles will under-perform and therefore lose competitiveness.

Poor Asset Utilisation

The right resources in the right place at the right time – ideally, that’s how every supply chain works.
As market demands and business needs may change rapidly, asset utilisation also needs to be flexible, and this includes warehousing, vehicles, systems, workforce and inventory, as well as distribution hubs and networks.
Too many organisations let their supply chains fossilise and nuture a culture of “well that’s how we’ve always done it”. When they need to be constantly checking the efficiency of the service they are supplying.
New technology may help, but effective solutions are often to be found in rethinking and re-articulating links in the supply chain to build in agility. Toyota gained a strong competitive advantage over rival GM in the 1980’s automobile market by avoiding the need to manufacture every part with new robot technology. Instead they operated low-tech manufacturing and supply chain techniques, but in a streamlined way to better use existing assets.

Taking care of these five factors will ensure that your logistics run smoothly, but doing well across the board can be tough for several reasons, not least because it requires clear thinking over the whole process. Be aware that while people may be experts in optimising their own functional area of a supply chain, they tend not to look at the entire process, end-to-end. Nobody thinks to join up the dots.

This may lead to ignoring smaller changes in one area that may appear unimportant on their own, but that may enable larger positive changes elsewhere. Conversely, a change made to achieve local improvement in one department may translate into an overall degradation in performance.
Inventory levels are a classic example. Accounting may want to save money by reducing inventory to near zero. However, that may then mean that production cannot react quickly enough to fulfill customer demand.

As many logistics managers will tell you, when it comes to logistics it is important to keep it real and practical. A clever combination of visionary ideas and actual movement of product can create a dynamic environment for your business. An example of this kind of practical thinking was seen at IBM in 1993. That was the year that Lou Gerstner stepped in to solve the IT vendor’s problems declaring “the last thing IBM needs right now is a vision”. Instead he focused the company on effective direction and execution.
He knew that supply chains too need both good strategy and practical focus. Often businesses are champions at strategising, but weak on actually making their supply chain work.

Hopefully your firm can find this middle ground to allow an easy flow of business, freeing up your time, so that you can do what you do best.

The current fluctuation in oil prices is being closely followed by all sections of the media, such is the influence of oil on the world economy. This scrutiny adds further to investment doubts and in itself assures that in the near future we cannot expect stabilization. Whilst the growing panic among drilling companies is concerning to all, as their investments begin to teeter on the border of profitability and they seriously begin to consider previously unthinkable scenarios.

The question then remains whether the recent jump in the price of a barrel of North Sea Brent oil by 16% to $57 a barrel  is the result of a change in the balance of supply and demand,  or merely a result of speculation by market traders. Unfortunately for those drilling companies, most commentators who study world oil reserves and production conclude that the latter is true, and that the current rise in prices is only temporary.

Together with currency fluctuations, the chemicals industry is greatly influenced by oil prices, as its value determines the direction of pricing policies for key suppliers of raw materials. Of course, the dynamics of these processes are themselves strongly influenced by the global nature of trade via the internet.

We at Spotchemi a.s. have implemented a project for the online trading of chemical materials as a response to the increasing dynamism of pricing processes in the chemicals’ sector. In addition to our already available real-time marketplace, we have added a blog portal, which will develop into a platform for the exchange of news and experience in chemicals trading.

At this point Spotchemi is collaborating with renowned companies in the field of chemicals’ markets research, so that they may contribute qualified studies of the markets that affect your business.

We believe that by doing this we can offer you a unique service of both real-time trading and analysis in one location. We hope you enjoy using our new platform and we look forward to your feedback and participation.

Your Spotchemi team