May 17, 2017 2:00 pm JST

Shakeouts gathering steam in global chemical industry

Chinese, Western producers following different M&A paths

TAKAYUKI KATO, Nikkei staff writer

TOKYO -- Realignment is heating up in the global chemical industry. While two Chinese state-run chemical companies may be merged into the world's biggest manufacturer, the industrial gas and paint industries are witnessing a series of moves to create giant companies.

An analysis of recent mergers and acquisitions that have resulted in new members of the industry's so-called "3-trillion-yen ($26.5 billion) club" shows that U.S. and European chemical makers are trying to boost profitability with focused use of management resources, while Chinese companies are seeking to absorb whatever assets they deem necessary.

Japanese chemical makers, which wrapped up the release of earnings reports for fiscal 2016 on Tuesday, are the focus of attention for their strategies to cope with global industrial shakeouts.

Random M&As by Chinese

China National Chemical, known as ChemChina, is the "eye of the storm" in recent M&A trends involving chemical companies, an executive of German chemical maker Bayer said.

ChemChina reached an agreement with Syngenta of Switzerland in February 2016 to acquire the world's largest maker of agricultural chemicals. The $43 billion deal will be the largest acquisition of an overseas business by a Chinese company.

The deal is at the final procedural stage, as Syngenta shareholders approved it at their general meeting. Combining Syngenta with Adama Agricultural Solutions of Israel, the world's largest manufacturer of generic crop-protection chemicals, ChemChina will emerge as a key player in the world markets for agricultural chemicals and seeds.

ChemChina is now taking aim at the domestic industry as the next target of its aggressive strategy.

Word circulated in October last year that ChemChina and another state-run Chinese chemical maker, Sinochem Group, would integrate their management. Although the speculation subsequently subsided, the British economic daily Financial Times said on May 8 that ChemChina and Sinochem are planning to merge this year, suggesting that merger talks between them have continued behind the scenes.

Combined sales of ChemChina and Sinochem are roughly $100 billion, much larger than the 57.5 billion euros ($63.74 billion) chalked up by BASF of Germany, currently the world's biggest producer of chemicals, in the business year ended in December 2016.

In China, government-led consolidation is underway among steelmakers and shipping companies with the aim of improving competitiveness. Moves in the chemical sector may be seen in the same context.

There also is a domestic reason for the possible merger of ChemChina and Sinochem. The acquisition of Syngenta is aimed at bringing its cutting-edge agricultural chemical and seed technologies to China to make food production in the country more efficient, ChemChina said.

The use of sales routes established by Sinochem, which primarily produces agricultural chemicals, may contribute to the supply of food for China's population of 1.3 billion.

Corporate acquisitions by ChemChina are seen as defying common sense in the chimerical industry because they include Pirelli of Italy, a well-known producer of tires for Formula One auto racing, and KraussMaffei Group, a German maker of injection molding machines.

"I have an impression that ChemChina has been going on a buying spree of renowned European companies to become an integrated manufacturer," an official in charge of chemicals at a Japanese trading house in Europe said. "But I can hardly see synergy effects."

In short, ChemChina is like a "nue," a mythical Japanese beast that has the features of various animals. Although the aim of its M&A strategy is unclear, ChemChina may want to combine all kinds of materials and machines in a bid to prepare for manufacturing operations in a digital age symbolized by three-dimensional printers.

Textbook M&As by everybody else

In contrast, the M&A strategies by American and European chemical companies are easy to understand. Linde of Germany, for example, conducts M&As that further reinforce its already strong operations, instead of pursuing the appearance of a comprehensive chemical maker.

Linde, the world's second-largest industrial gas producer, reached a basic agreement with third-ranked Praxair of the U.S. at the end of last year to integrate their management. Demand for industrial gas is expected to grow, as it is widely used in semiconductor and automobile production, medical institutions and many other places.

Linde and Praxair logged sales totaling $27.5 billion in their chemical divisions in 2015, far surpassing those at Air Liquide of France, currently the world's largest industrial gas maker, according to the Chemical & Engineering News of the U.S. Sales posted by Taiyo Nippon Sanso, Japan's largest maker, in fiscal 2016 ended in March were much smaller at 581.5 billion yen.

In the paint industry, PPG Industries of the U.S., the second-largest maker in the world, launched a takeover bid for industry leader AkzoNobel of the Netherlands to create a manufacturer with sales of more than $30 billion and join the 3-trillion-yen club.

While Akzo has turned down three takeover proposals from PPG, Akzo shareholders are growing discontented with the management's refusal to negotiate with PPG. Akzo remains in a state of tension as PPG may resort to a hostile tender offer.

In the U.S., Dow Chemical and DuPont are expected to merge. Combined sales of the two companies reached $75.7 billion in 2016. Although Dow and DuPont said Thursday that they will review a post-merger plan to divide their operations into three companies including those for commodity chemicals and agricultural chemicals, they remain poised to further reinforce their strong operations.

Japan's only member

Mitsubishi Chemical Holdings is the sole Japanese member of the 3-trillion-yen club, maintaining the top spot in the chemical industry in Japan through M&As and continuous shedding of unprofitable operations. It is trailed by a group of companies with sales of 1-2 trillion yen, including Sumitomo Chemical.

Some Japanese chemical companies have captured leading positions in specific fields, such as Shin-Etsu Chemical for vinyl chloride resin and Toray Industries for carbon fiber. But few are seen as global leaders in terms of both sales and market capitalization.

Chemical companies still have ample opportunities to play their roles as there is a mountain of issues to address in various parts of the world, including global warming, population increases and urbanization.

Chinese chemical makers continue their practice of "discontinuous" M&As to buy not only materials but also equipment, while American and European companies are leading the consolidation of the chemical industry through more conventional strategies. Meanwhile, Japanese chemical companies are being tested for their ability to show they can maintain their presence.

Taiyo Nippon Sanso Corp.

Japan

Market(Ticker): TKS(4091)
Sector:
Industry:
Process Industries
Chemicals: Specialty
Market cap(USD): 5,049.93M
Shares: 433.09M

Mitsubishi Chemical Holdings Corp.

Japan

Market(Ticker): TKS(4188)
Sector:
Industry:
Process Industries
Chemicals: Major Diversified
Market cap(USD): 14,338.84M
Shares: 1,506.28M

Sumitomo Chemical Co., Ltd.

Japan

Market(Ticker): TKS(4005)
Sector:
Industry:
Process Industries
Chemicals: Specialty
Market cap(USD): 10,505.81M
Shares: 1,655.44M

Shin-Etsu Chemical Co., Ltd.

Japan

Market(Ticker): TKS(4063)
Sector:
Industry:
Process Industries
Chemicals: Specialty
Market cap(USD): 39,349.42M
Shares: 432.10M

Toray Industries, Inc.

Japan

Market(Ticker): TKS(3402)
Sector:
Industry:
Process Industries
Textiles
Market cap(USD): 15,794.19M
Shares: 1,631.48M

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