By: Ramkrishna Kashelkar

Across the world, the chemicals industry is undergoing the process of globalisation, consolidation, product innovation and cost rationalisation. This has resulted in a steady shift of manufacturing from western countries to Asia-mainly India, China and West Asia. No wonder then that the domestic chemical production and exports are increasing steadily, with domestic 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% in the April-December 2009. This was the best performance for the industry since April-December 2004, when the index had grown 16% year-over-year.

For the December 2009 quarter, the industry did an excellent turnaround. After four consecutive quarters of falling profits, the aggregate profit 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 of December 2008 quarter when the profits fell by 66% y-o-y, a strong production recovery played a vital role.

In the past one year, the industry has done well on the bourses. 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 also attracting 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 economic slowdown, this has prompted a number of M&As globally. According to a recent KPMG study, the massive capacity expansion in bulk chemicals in West Asia between now and 2015 may make around one-fifth of the European petrochemicals industry uncompetitive.

This will reinforce the desire of western players to move away 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 for buyouts, Asian companies prefer to buy these ready-built businesses at attractive valuations rather than setting up new facilities.

Such acquisitions can grant them ready access to better technologies as well as markets. One should view Reliances efforts to acquire LyondellBasell or the Kiri Dyes acquisition of Dystar in this light.

Companies from China and Middle East too are not to be left behind in this race. Experts are predicting an increase in the M&A activity in the chemical industry over the next couple of years with companies in the West likely targets and firms from West Asia and China the buyers.

M & A : Mergers and Acquisitions


Originally published in The Economic Times, dated 4 Mar 2010