The World Chemical Industry Got Bigger but Slimmer in 2017

Economic and political pressure is encouraging the chemical industry to become more specialised as certain sectors consolidate in 2017.

2017 Consolidations in the Chemical Industry

The chemical industry is in the throes of a massive consolidation that has sparked worldwide competition concerns and regulatory investigations. Perhaps the area of largest amalgamation is in agrochemicals, with mega-mergers between Dow and DuPont; Bayer and Monsanto; and ChemChina and Syngenta.

Bayer’s $66 billion takeover of Monsanto was agreed in late 2016, with the intent of providing farmers with a one-stop shop for their seeds and crop protection products. The two companies have argued that this vertical integration of traits, seeds and agrochemicals will create economic efficiencies that outweigh any harm that the merger would pose to competition. However, opponents of the deal have suggested it would just magnify the market power of the few companies that dominate the global field crop sector.

The two agricultural giants are awaiting approval from international regulators. A decision from the US Department of Justice is expected around the end of 2017, while the European commission is working towards a deadline of 5 March 2018.

Meanwhile, several US state attorneys general are also investigating competition concerns related to the deal. If it goes through, almost the entire global seed and agricultural chemical business will be controlled by just four companies: Bayer–Monsanto, ChemChina–Syngenta, Dow–DuPont, and BASF.

ChemChina and Swiss firm Syngenta agreed a $43 billion merger in 2016, aimed at enhancing China’s agricultural output. Competition regulators in the US and Europe expressed concern that the two companies have overlapping portfolios in the areas of herbicides, insecticides, fungicides and plant growth regulators.

To satisfy EU regulators, the two companies agreed to sell off a large part of their European pesticide and growth regulator business, while the US Federal Trade Commission’s (FTC) demanded they offload three types of pesticides.

Other efforts to block the deal intensified this year as it gained the necessary international approvals. In the US the Nebraska Farmers Union tried to get the merger kiboshed at the last minute by petitioning the FTC. Nevertheless, the deal was finally completed in June.

Increased Specialisation in the Chemical Industry in 2017

While there is a clear consolidation going on within the chemical industry, there is a simultaneous movement to refocus on core functions and split off peripheral or underperforming segments.

In March, AkzoNobel of the Netherlands announced plans to separate its speciality chemicals business from its paints and coatings unit by April 2018. The goal of the break-up is to create two more focused and distinct companies.

But the landscape is dominated by the rumbling $130 billion merger between Dow Chemical and DuPont, which was completed at the end of August. The newly created DowDuPont has been restructured into three distinct businesses, with the aim of eventually splitting into separate companies: agriculture; material sciences, and speciality products like advanced polymers, electronics and nutritional goods.

Dow&DuPont Structure Change

To satisfy competition regulators, Dow has divested its global ethylene acrylic acid copolymers and ionomers business, and a portion of Dow AgroSciences’ corn seed business in Brazil. For its part, DuPont agreed to shed its cereal broadleaf herbicides and chewing insecticides portfolio. In addition, the company has sold portions of its crop protection portfolio to US firm FMC, including some R&D capabilities.

As it prepares to split itself into three, DowDuPont unveiled plans to reduce its global workforce, consolidate buildings and facilities, and shut down assets to help achieve $3 billion in cost savings. The company did not disclose how many jobs would be cut, but it pointed to $180 million in pre-tax charges incurred during the third quarter and another $1 billion in charges expected for the fourth quarter.

Concerns from Analysts

Although it may seem that the chemical industry is converging, what’s actually occurring is increased specialisation, according to industry observers. “The simplifying of portfolios and the dealmaking that is going on will help reduce costs for a lot of companies - it will create an altogether more profitable, more focused industry,” says Vijay Sarathy, North America industry leader for chemicals at Accenture.

However, analysts warn that although streamlined chemical businesses with narrower purviews are easier to manage, they may have difficulty generating growth through innovation in new areas or technology. Being too homogeneous or overly focused can limit growth, especially in very consolidated markets.