Chemical transactions may rebound first

In the first half of 2020, affected by the COVID-19 crisis, various industries, including the chemical industry, were faced with unprecedented challenges and faced various difficulties. However, during the epidemic, the chemical industry's production, research and development, transportation, and capital operations are still proceeding in an orderly manner.

Trends and highlights

In the first half of 2020, the chemical industry's transaction volume and transaction value both declined.

Compared with the first half of 2019, the total transaction volume in the first half of 2020 decreased by 4% to 370 transactions.

The average transaction size in the first half of 2020 was US$64.2 million, compared with US$236.6 million in the first half of 2019. As a result, the total transaction volume in the first half of 2020 has fallen by 77% compared to the first half of 2019.

Ineos plans to acquire BP’s global aromatics and acetyl business for US$5 billion. This is the only huge transaction reported in the first half of 2020. As of the first half of 2020, the top five transactions totaled US$14.5 billion, accounting for approximately 60% of the total transactions.

Chemical industry analysis

Due to BP's global aromatics and acetyls business/Ineos' transactions in the first half of 2020, the transaction value of bulk chemicals increased the most at approximately US$4 billion. However, compared with the first half of 2019, transaction volume fell by 5%. The trading volume of fertilizers and agrochemicals in the first half of 2020 increased by 34% compared to the first half of 2019, although the transaction volume fell by 18%, which means that the value of transactions in sub-sectors is greater.

Another notable large-scale transaction of undisclosed value is the merger in January this year through the merger of the legacy Syngenta owned by ChemChina, the agrochemical business of Sinochem, and Adama ( Adama) 74% of the shares, established the new Syngenta Group (Syngenta Group). The newly established Syngenta Group has 48,000 employees in more than 100 countries around the world, and its sales in 2019 reached 23 billion US dollars. The next few years will definitely have a significant impact on the Ag chemical industry. The newly established Syngenta Group has 48,000 employees in more than 100 countries around the world, and its sales in 2019 reached 23 billion US dollars. The next few years will definitely have a significant impact on the Ag chemical industry. Compared with the first half of 2019, industrial gas is the only sub-industry whose transaction value and transaction volume both decline in 2020, down 55% and 47% respectively. Specialty chemicals rank first in terms of transaction value and transaction value, accounting for 36% and 48% of the total transaction value and 48% of the total transaction value in the first half of 2020, making it one of the top five transactions. Due to the lack of large transactions, in the first half of 2020, the transaction volume of diversified and other businesses dropped by 93% compared with the first half of 2019.

Finance and strategic investment

In the first half of 2020, strategic investors continue to dominate transaction value and transaction volume, accounting for 68% and 56% of total transaction value and transaction volume, respectively. In the first half of 2020, four of the top five deals were sponsored by strategic investors. Financial buyers remained active and began to increase activity in the second quarter. In the second quarter of 2020, the number of transactions completed by financial investors surpassed strategic investors for the first time in the past 3 years, because strategic investors focused on stabilizing their existing businesses during the pandemic.

Prospects for chemical trading

In January of this year, with the establishment of Syngenta Group, one of the world’s largest agrochemical companies, chemical trading activities began to become active, but during the COVID-19 pandemic, trading Activities fell sharply. In the current financing environment and economic situation, the investment target is no longer valid for existing transactions, and a large number of transactions have been postponed or terminated in the first half of 2020; although a glimmer of hope is seen towards the end of the second quarter.

The global pandemic will have a wide-ranging and lasting impact on people's lifestyles, leading to profound changes in the global economy and M&A environment. The chemical industry is certainly not immune. In this case, future chemical trading activities will be different.

Integration and value creation

These factors are expected to drive further corporate integration, as companies will focus on core portfolio growth, opportunities arising from difficulties, divestiture of non-core assets and post-transaction value creation to improve investment returns. This is more obvious in the commodity chemicals and agricultural chemicals sub-sectors, such as the recently announced Ineos and British Petroleum (BP) transaction, and Dow's sale of the railway hub to Watco.

As the company focuses on core portfolio growth, opportunities in difficult situations, divestiture of non-core assets, and post-transaction value creation to increase return on investment, these factors will drive further integration. This is even more evident in the recently announced INEOS/BP agreement and Dow's divestiture of the railway hub to Watco's commodity chemicals and agrochemical sub-sectors.

Innovation driven

The demand trajectory of chemical products in many end-market applications has changed, bringing both challenges and opportunities. Innovation-driven transactions will play a more important role in the formation of new inorganic growth strategies (including asset-light technology acquisitions and even cross-industry transactions by chemical giants). This is particularly important for the specialty chemicals sub-sector.

Cross-border transactions

Due to the continuing acceleration of globalization and the painful lessons learned from the fragility of the global chemical supply chain, chemical companies may use cross-border transactions to readjust their footprints and supply chains in each major country of operation.

Due to the capital-intensive nature of the chemical business and the long delivery time with high-quality suppliers/raw material sources, it is expected that strategic adjustments will continue to promote strong cross-border transaction activities in the next few years.

Private equity

Private equity (PE) has trillions of dollars in funds and has been on the sidelines, worrying about the excessive valuation of target assets. The unexpected global pandemic and economic recession will provide opportunities for private equity investment companies to find attractive assets with reasonable or even low valuations. History shows that private companies that focus on the chemical industry and can release value through operational improvements can see higher returns than their peers.

Capital market

Although small private chemical companies may compete for liquidity, under the current monetary policy environment, global chemical giants have seen strong capital availability through stock and bond markets. Once stable operations, this will further enhance their ability to make strategic acquisitions and promote a strong M&A market in the next few years.

In short, in the current global health crisis and economic recession, a transaction-focused inorganic growth strategy may become more important for participants in the chemical industry. With sufficient funds available, chemical trading activities are expected to rebound before the global economy fully recovers.