Value Creation In The Chemical Industry: Challenging The Business Cycle via CSInvesting
One Industry Cycle, Varied Value Creation Among Segments
The chemical industry is highly cyclical, showing huge ups and downs both in operational results and market valuation. The cyclical nature can easily be traced by looking at the aggregate EVA and the aggregate MVA.
The period following the last recession in 1992 can be divided into an expansion period (from 1993 to 1997) and a contraction period (from 1998 until to-day). Over the last ten years, value creation at the operations level, represented by aggregate EVA, moved in line with the value created for shareholders, represented by MVA. Only during the stock market boom at the end of the millennium, mainly in 1999 and 2000, did the development of chemicals stocks seem to move away from its intrinsic value – a fact mainly driven by high valuations of hybrid chemical companies with a strong foothold in the pharmaceutical business. Later this was corrected by a sharp decline in share prices in 2001.
Until 1999 operative value creation moved well in line with the value created for shareholders
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Apart from long-term trends, large swings on the demand side as well as on the supply side impact all the industry participants. However the value created shifted within the industry. Some sub-segments and players better managed risks and opportunities compared to others and were more successful in convincing investors of the underlying potential of their businesses.
The chemical industry is highly fragmented and heterogeneous. The world’s ten biggest chemical companies accounted for only 13% of the world’s chemicals production in 2000. Chemical companies in Western Europe account for approximately 32% of the worldwide chemical market volume. The industry’s heterogeneous environment is mainly due to the fact that it supplies virtually all sectors of the economy. Products may serve as intermediates for further industrial processes, or may be used in the environment, health care or nutrition segments. Despite fragmentation at a company level, going down to product level reveals a much higher degree of concentration.
To correctly take the industry’s economics into account, we investigated developments in five segments:
- Conglomerates: chemical companies of hybrid nature, engaged in various chemical fields – from basic chemicals to pharmaceu-ticals (companies with sales in the pharma-ceutical business exceeding 50% were ex-cluded from the study).
- PPP: companies engaged mainly as producers of plastic and polymer related products.
- Industrial Gases: companies whose main business is to manufacture and sell gases for large industries, electronics, or the healthcare business.
- Speciality Chemicals: industry partici-pants focusing on high value added ser-vices and selling chemical products for their specific functionality or performance (usu-ally in small quantities).
- Petrochemicals: companies focusing on base chemicals and oil derivatives – mainly divisions of international oil & gas companies.
Each of these sectors shows, in addition to general characteristics of the industry, distinct segment features such as variations in sales volume, profitability, or growth dynamics. Operative value creation, in combination with investors’ expectations of future performance, influences the total value created for share-holders.
Shift of value creation within the industry – some sub-segments were better able to manage risks and opportunities
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