Across the world, the chemicals industry is undergoing theprocess of globalisation, consolidation, product innovation and costrationalisation. This has resulted in a steady shift of manufacturing fromwestern countries to Asia-mainly India, China and West Asia. No wonder thenthat the domestic chemical production and exports are increasing steadily, withdomestic players expanding and increasing foreign investment.
The chemical industry, which carries a weight of 14% in India's index of industrial production (IIP), registered a year-on-year growth of 12% inthe April-December 2009. This was the best performance for the industry sinceApril-December 2004, when the index had grown 16% year-over-year.
For the December 2009 quarter, the industry did an excellentturnaround. After four consecutive quarters of falling profits, the aggregateprofit of 71 listed Indian chemical companies jumped 280% to Rs.1,418 crore.Although a part of this growth can be attributed to a particularly low base ofDecember 2008 quarter when the profits fell by 66% y-o-y, a strong productionrecovery played a vital role.
In the past one year, the industry has done well on thebourses. The 15-share ET Chemicals index gained 103.5% compared to the 89.8%increase in the benchmark ET 100 index. The Indian chemical sector is alsoattracting foreign investments. During FY09, the foreign direct investment(FDI) in the domestic chemical industry jumped 227% to $749 million against$229 million in FY08.
In view of the demand destruction following the economicslowdown, this has prompted a number of M&As globally. According to arecent KPMG study, the massive capacity expansion in bulk chemicals in West Asia between now and 2015 may make around one-fifth of the European petrochemicalsindustry uncompetitive.
This will reinforce the desire of western players to moveaway from bulk chemicals into downstream specialty chemicals with innovative,sustainable solutions that help them stay ahead of emerging market competition.
However, with the companies in the West available forbuyouts, Asian companies prefer to buy these ready-built businesses atattractive valuations rather than setting up new facilities.
Such acquisitions can grant them ready access to bettertechnologies as well as markets. One should view Reliances efforts to acquireLyondellBasell or the Kiri Dyes acquisition of Dystar in this light.
Companies from China and Middle East too are not to be leftbehind in this race. Experts are predicting an increase in the M&A activityin the chemical industry over the next couple of years with companies in theWest likely targets and firms from West Asia and China the buyers.
M & A : Mergers and Acquisitions
Originallypublished in The Economic Times, dated 4 Mar 2010
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