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The continuing global economic expansion—albeit Second, it looks at drivers of this performance and
tepid—has been helping much of the chemical what they mean for the industry’s prospects.
industry to report favorable sales and earnings over
the past year. Major changes in the price of crude The best performer in the value chain
oil have historically had an influence on the
profitability of segments of the chemical industry, Our analysis shows that the chemical sector is
but events are still unfolding around the fall in continuing to do well, with its performance on total
oil prices since last summer. return to shareholders (TRS) among the highest
of any sector (Exhibit 1).1 Chemicals are also the TRS
How have these developments translated into capital- winner in their value chain, based on performance
markets performance? This article first presents since 2000: the chemical sector is registering
the results of our latest analysis describing different higher TRS performance than most of the upstream
aspects of chemicals’ continuing strong performance. industries that provide its feedstocks, such as oil
Exhibit 1 The chemical industry has outperformed the world equity market.
All chemicals
World market June 2008– Dec 2008–
450 Mar 2015 Mar 2015
400
All chemicals 9 19
350
300
World market 6 14
250
200
150
100
50
0
2002 2004 2006 2008 2010 2012 2014
Source: Datastream
Exhibit 2 The chemical sector has the strongest TRS performance in its value chain.
Total return to shareholders (TRS), compound annual growth rate, Dec 2000–Mar 2015,
%
Specialty 12.7
Diversified 8.0
Automobiles 8.0
Electronics 6.3
Pharmaceuticals 5.9
Exhibit 3 Over the long run, specialties and commodities show similar TRS performance.
Specialties Diversified
Brent2 Dec 2000– Dec 2008– Dec 2011–
800 Mar 2015 Mar 2015 Mar 2015
Commodities3 14 22 10
600
Specialties 13 20 23
400
All chemicals 11 19 16
200
Diversified 8 18 13
0 Brent 6 6 −20
2002 2004 2006 2008 2010 2012 2014
1
Figures have been calculated using $.
2Brent crude oil.
3Excluding fertilizers.
Exhibit 4 The higher valuation of specialty chemicals has been driven by continuing
improvement in ROIC performance.
22
20 Specialties
18
16
14
12
Diversified
10
8 Commodities
6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
1Data are median of 100 selected companies from the chemical industry, excluding fertilizer companies and SABIC.
Source: Datastream
the end of 2008, commodities were the leader, sector’s performance. Specialty-chemical companies’
two percentage points ahead of specialties, continuing ability to improve ROIC has spurred
with both specialties and commodities slightly improvement in these companies’ valuation over the
ahead of diversified companies. Assessing past three years. Expectations associated with
the 2000 to 2015 period, commodity- and specialty- the commodity-chemical cycle have traditionally
chemical companies have demonstrated a similar driven valuations in the sector, but they have become
performance, with commodities just one percentage more muted over the past three years. At the
point in front; again, both were ahead of diversified same time, the ROIC of both commodity and
chemical companies. diversified companies has slipped over the period,
creating a slight drag on performance (Exhibit 4).
The similar longer-term TRS performance that
specialties and commodities sectors have registered Western incumbents outpaced Asian
suggests that investors have been rewarded companies in TRS performance
in both sectors, contrary to the long-standing
conventional wisdom that specialties are Looking at regional developments, American and
more attractive. Nevertheless, our analysis shows European chemical companies have outpaced
that there are differences in the drivers of each their Asian rivals over the past three years. This
Exhibit 5 Asian chemical companies1 have historically performed better than those in
other geographies, but they’ve stalled since 2011.
3 12
Japan
5 11
Source: Datastream
Exhibit 6 Turnover is dynamic, with a lot of upward and downward mobility among
chemical companies.
61
The quintile Top 20% 25
a company 14
started
in, 2004–08 77
Middle 60%
11 12
43 50
Bottom 20%
7
Exhibit 7 In the group of chemical companies with higher ROIC performance, focused
companies are more represented.
2 7
0–5%
3 9
41 42
5–10%
20 21
39 33
10–15%
33 19
16 9
15–20%
18 20
2 7
20–25%
19 12
3 7
25–30%
6 12
>30%
1Sample excludes fertilizer companies and SABIC. Focused companies are companies with more than 80% of sales in
2 businesses; less focused companies are companies with less than 50% of sales in 2 businesses. Figures may not sum to
100%, because of rounding.
Exhibit 8 The divergence in TRS performance between focused and less focused players
has slowed since 2011.
Less focused
Focused Dec 2000– Dec 2011–
650 Mar 2015 Mar 2015
600
550 Focused 13.4 16.3
500
450 Less focused 7.9 12.8
400
350
300
250
200
150
100
50
0
2002 2004 2006 2008 2010 2012 2014
1Market value–weighted TRS (reweighted monthly); sample excludes fertilizer companies and SABIC. Focused companies
are companies with more than 80% of sales in 2 businesses; less focused companies are companies with less than 50% of sales
in 2 businesses.
Source: Datastream
performance among less focused companies. Our and with it demand for chemicals. But the oil-
analysis indicates that focused companies price outlook is of course volatile, and so by extension
had higher TRS than less focused companies from are its effects on the competitive positions and
2001 to 2011, but over the more recent three- profitability of chemical players in different
year period that we analyzed, the performance of geographies. On the M&A side, the high level of
the two groups has been closer (Exhibit 8). valuations of publicly held chemical companies
could dampen deal activity, but it still represents an
attractive environment for more IPOs and spinoffs.
Looking at longer-term trends, the rise of emerging
Where next for the chemical industry? Even with market-based producers in the specialties and
the rebound from lows early in the year, oil prices are commodities sectors will continue to reshape the
more than 40 percent under what they were a industry. Amidst these uncertainties, there’s
year ago. The lower prices could bolster GDP growth a clear case to be made that chemical-company
this article. “Squaring the circle: Growth and value creation,” McKinsey on
Chemicals, Spring 2012, Number 4.
3 Economic profit is defined as operating profit net of opportunity
Bing Cao is a consultant in McKinsey’s New York
cost of capital.
office, Obi Ezekoye is an associate principal in 4 Our research compared the performance of a group of
the Minneapolis office, and Michael Glaschke is a companies with more than 80 percent of sales in two
principal in the Munich office. businesses, which we used to represent focused companies,
with a group of companies with less than 50 percent
Copyright © 2015 McKinsey & Company. of sales in two businesses, constituting a less focused group.
A database of approximately 120 global chemical
All rights reserved.
companies was analyzed.