Changing the Cyclical Nature of the Chemical Processing Industry

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Researched by Industrial Info Resources (Sugar Land, Texas)--For the better part of a century, the global Chemical Processing Industry (CPI) was considered very cyclical, entering a low or drawback in spending approximately every 10 years. In the early 1990s the industry had the signature marks of reaching a low in this cycle, and once again the industry was struggling just prior to the Sept. 11, 2001, attacks in New York, after which it fell sharply. Prior to the financial and economic market breakdown that began in mid-2008, the CPI had been performing very strongly. CPI plant owners had made a significant number of structural changes to their businesses, and most had built enough momentum that the real affects of the recent recession didn't influence daily operations until almost a year ago.

Considering the strength of the industry as it entered the recent recession, many industry observers feel strongly that the CPI is at the cusp of showing its strength again as it exits the recession. One of the activities used to measure the industry's strength or weakness is the level of merger and acquisition (M&A) activity, which has appeared to be on the rise over the past two months. Several industry majors such as The Dow Chemical Company (NYSE:DOW), BASF SE (OTC:BASFY), National Starch (Bridgewater, New Jersey) and others have recently agreed to or completed several significant mergers or acquisitions. Financial markets, or at least the outlook for them, continue to improve, lending a hand to increased optimism.

In past years, the drive behind M&A activity was largely about becoming larger or more dominant in your core business or businesses. Today, some of the key drivers behind M&A activity are not only to maintain your position in the marketplace, but perhaps even more importantly, to grow in less volatile markets. Attractive M&A's include diversification, not only to spreading risks, but also to seek entry into less volatile, yet very sizeable, markets.

Almost one month ago, Dow Chemical sold its Styron division to an affiliate of Bain Capital (Boston, Massachusetts), marking another milestone in the company's plan to pay down debt and focus on higher margin businesses. A divesture such as this will also help to distance Dow from a number of chemical commodities proven to be more volatile recent years. BASF is progressing with plans to acquire Cognis (Monheim, Germany), a specialty chemical and nutritional ingredients company with operations around the world, for an estimated $3.8 billion. This acquisition will give BASF greater exposure to consumer markets that were strained much less severely than many during recent economic times, such as nutritional and health-related chemicals.

Demand for chemicals such as olefins, polymers, plastics and similar commodities at one time equaled one the largest components that dictated the health of the industry. As merger and acquisition motives and decisions are increasingly made based on a focus to diversify, this could change the historically cyclical nature of the industry.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.