Moving up the value chain
Hosting total investments of over S$50 billion, Jurong Island works as a plug-and-play integrated system feeding more than 100 chemical companies via a pipeline network. Though the island also produces advanced formulations, Singapore is still largely an upstream and middle-stream chemical sector, producing feedstocks, intermediates, and derivatives. To circle the full value chain, the next step for the industry will be to grow its downstream segment.
A decade ago, Singapore was already outlining a Jurong 2.0 masterplan to better integrate its refinery and petrochemicals products with higher-value polymers in niche segments. This plan was reinforced through the Industry Transformation Map (ITM), which includes targets to create S$12.7 billion in value-added products and 1,400 new jobs by 2025.
In many ways, growing the share of higher-value products is a natural progression for Singapore. In the 80s and 90s, oil and gas giants dominated the industry. ExxonMobil, for example, started its first cracker on Jurong Island 20 years ago, marking its entry into the chemical space. Last year, however, the company announced a multi-billion-dollar investment to convert fuel oil and other crude raw materials into higher-value lubricants base stocks and distillates, a project expected to be complete in 2023.
"Last year was difficult for the oil, petrochemicals and energy sectors, but in some regards, the disruption was needed to prompt consolidation. One cannot be a lone player in a jungle of other lone players, so collaboration is key."
Ajay Bhattacharya, Managing Director, Fortrec
Many specialty chemical heavyweights have now established a base in Singapore. BASF, the world’s largest chemical player by sales, operates four production facilities in Singapore, as well as a nutrition and health (Newtrition) lab for the APAC region out of the city-state. Evonik Industries, a leading specialty player, has four plants in Singapore, including two specialty chemical plants in Tuas. Back on Jurong Island, Solvay operates the largest specialty alkoxylate surfactants plants in APAC.
The availability of feedstocks on the island and the connectivity between different players give rise to advantageous synergies. For instance, Linde’s investment of US$1.4 on Jurong Island will quadruple the company’s capacity for hydrogen and syngas; most of the surplus will be sold to its neighbour on the island, ExxonMobil. This will be the single largest investment in Linde’s history.
At the same time, Singapore must develop a value-driven chemicals model alongside its volume-based traditional petrochemicals business. In the volumes’ game, where price reigns, lower-cost Asian or Middle Eastern producers fare better compared to Singapore. The pandemic accentuated cost considerations, as demand evaporated, leading to overcapacity and logistical hurdles, or to plants sitting idle.
2020 brought some hard-hitting headlines in the petrochemical space. Shell’s restructuring away from hydrocarbon dependency came with 9,000 job cuts worldwide, as announced last September. ExxonMobil, responsible for over US$17 billion in fixed asset investments in Singapore, will also let go of around 300 people in the country by the end of this year.
Meanwhile, prospects in non-cyclical specialty chemicals are ripe for growth. According to Research and Markets analysis, the global specialty chemicals market will grow at a 6.5% CAGR between 2020 and 2024. More specifically, demand for electronic applications, biodegradable products, and construction lead growth projections. APAC takes 36% of this market by revenue, of which China alone accounts for 40%.
Watching the downstream
Apparao Myneni, strategic industry manager at SICK Sales and Service (SICK AG), observed that the muted demand in the commodities space contrasting with the expected growth for specialized molecules, like pharma active ingredients or surfactants, will lead diversified chemical players to re-orient to those high-growth downstream markets: “In 2021, many players have been rethinking their portfolios to capture a greater share of the specialty chemicals in an attempt to balance the negative yield on basic chemicals,” he said.
MCAP (Mitsui Chemicals Asia Pacific), for example, currently dedicates 90% of its APAC portfolio on the mobility and food & packaging sectors, but is looking at healthcare and R&D investments for its next-gen business growth: “Over the years, we have progressively diversified our portfolio from a petrochemicals-base to specialty chemicals like specialty polymers and healthcare ingredients, ramping up production in these two categories,” said Ikunori Sakai, CEO of MCAP.
Linde, the gas giant with over US$28 billion in global revenues and present in 100 countries, also makes strategic investments in complex gases, especially in the electronics sector.
In the distribution space, German player Helm wants to balance off its portfolio in petrochemicals, such as methanol, glycose, styrene and propylene, with more intermediates and performance chemicals, with an eye on the surfactants market. Similarly, Linkers Far East (LFE), traditionally focused on commodities, is diversifying its portfolio to be present in both segments: “Ideally, we would like to have a mix of commodities and specialty chemicals, and we started by introducing special additives for plastics and other performance chemicals used in rubber, paints and coatings,” said Shamsher Zaman, managing director at LFE.
Chemical deals amounted to about US$37.7 billion in 2020, compared to the US$182 billion in 2019, Young & Partners reported. Last year, travel bans and complex pricing scenarios slowed M&A activity, but returning business confidence with the rollout of the vaccines and economic restart, as well as a promising borrowing regime, allow M&A transactions to make a strong comeback in 2021. Paul Kau, EHS technical director for Asia at Golder, explained: “The stimulus injected by economies around the world, together with low interest rates, led to increased liquidity in the market, which drove M&A activity as stressed chemical companies, amongst others, seek support through market consolidation.”
Kau expects more consolidations, especially in the next two to three years, as chemical companies re-think and reprioritize their portfolios, seize opportunities in new growth areas and divest non-core or non-performing assets.
With many companies still in recovery mode, the upside potential encourages high transaction multiples, however, insecurities about a company’s long-term performance are likely to deter cash-intensive investments. Companies in specialty chemicals, particularly in flavors and fragrance, personal care, healthcare, or water filtration technologies, command high multiples and positive arbitrage as they are highly sought after. At the opposite end, assets in the fertilizers, lubricants and additives, as well as paints and coatings marketspace, are more prone to consolidation.
Shift to pure-play
One prominent trend that is likely to encourage M&A activity is the preference for pure-play. Marking a re-commitment to core assets, carve-outs have been popular. For instance, BASF sold its pigments division in Europe to the global printing inks leader DIC, while Lonza aims to exit its specialty ingredients business (LSI) in a US$4.7 billion transaction to Bain Capital and Cinven, to focus on its healthcare division instead. Also, wanting to focus on its nutrition, health, and sustainable living, DSM sold its resins and functional materials business to Covestro for €1.6 billion; in turn, this transaction will help Covestro strengthen its business in sustainable coatings resins.
BCG.com analysis found that focused-specialty companies do better in terms of TSR (total shareholder returns) compared to multi-specialty companies. The same source indicates that commodity chemical players saw double-digit TSR losses in the first half of 2020. Indeed, in the petrochemical space, pure-play petrochemicals were less impacted by the pandemic compared to integrated oil supermajors, many of whom have still not seen their share price recover. In this sense, BP decided to divest its petrochemical unit to Ineos in 2020, preferring to invest in low-carbon ventures.
Saudi Aramco took a different approach, integrating with SABIC in a megadeal worth US$69.1 billion in 2019. Petrochemical feedstocks represent about 12% of global oil demand, so the integration secures downstream demand for the Saudi corporation. In exchange, SABIC gains a cost advantage in the market. The company is making significant investments, currently building the first ULTEM resins plant in Asia, which will supply mostly to customers in the technology industry by 2022.
Science Direct suggests that the chemical industry is becoming more polarized between commodities and specialties, players with a presence in both being forced to choose between the two because they entail different business models and production processes. Whereas low-cost basic chemical producers prioritize maximum efficiencies through automated processes as part of a continuous production cycle, fine chemical producers need to prioritize maximum flexibility through batch production and shifting between various raw materials, to respond to shifting market needs.
Raymond Sinnah, Group EVP (APAC) & president of mineral specialties division, at SEQENS GROUP, shared the same belief, highlighting that common trends like sustainability and digitalization affect the two sectors differently: “Everyone needs to choose their battles. Typically, for commodities, cost position and cash flow are detrimental; fluctuations in the price of crude oil and taxation of CO2 emissions announce bigger financial hits in this sector. In specialty chemicals, there is a growing focus on more diversified products, more value chain integration (and moving downstream), and thinking ‘solutions’ instead of products.”
This philosophy is notably popularized by Arkema, which announced its intention to become a 100% pure specialty player by 2024. The company will pursue targeted divestments and acquisitions as part of this strategy, having already divested its PPMA (poly-methylmethacrylate) business to Trinseo. Danny Foong, general manager at Arkema Singapore, told GBR that the company will be focusing on six main platforms hereon: bio-based products, new energies, water treatment, electronic solutions, lithium-ion materials, and home efficiency & insulation.
Back in 2018, AkzoNobel sold its specialty chemicals business to the Carlyle Group. The new standalone specialty player, Nouryon, is now focused on performance formulations and technology solutions. Sticking closely to its identity as a specialty player, it rebranded its’ industrial chemicals business under the name of Nobian in 2021, though it remains part of Nouryon.
Brenntag also marked this differentiated approach, by unveiling a new company structure in 2021. Brenntag Essentials and Brenntag Specialties will be operated as two separate businesses. Henri Nejade, COO of Brenntag Specialties, explained the rationale behind the move: “While the specialty sector requires a more customer-focused approach, basic chemicals call for a more product-and-service-oriented approach, with a high focus on logistics for the management of large volumes.”
M&A in the distribution space
Faster to react to market changes, including higher demand for healthcare or food ingredients, distributors bought and sold with confidence in 2020. As the market moves towards greater consolidation, high-value distributors with a footprint in tiger-growth markets or key growth segments like healthcare were the most coveted. Brenntag acquired the largest Chinese food and nutrition ingredients distributor, Zhongbai Xingye, for a total of €90 million, as well as UK-based water treatment distribution company ICL Packed.
In 2020, Azelis made two major acquisitions in personal care in China, one in pharma space in India, and one in food ingredients in Indonesia. This year, the global specialty chemicals and food ingredients distributor also completed the acquisition of CW Pacific in Australia in the food space and announced acquisitions in Vietnam and the Philippines focused on personal care and CASE (coatings, adhesives, sealants and elastomers). Present in 50 countries, Azelis has doubled its business in APAC in the last five years, pursuing an agile and aggressive inorganic strategy.
DKSH Performance Materials business unit, a market leader in pure-play specialty distribution in Asia, also steered forward its M&A activity in 2020, acquiring specialty chemicals distributor Axieo, thereby deepening its presence in Australia and New Zealand.
Distribution assets in the food and agriculture space also spark commensurate interest. Singapore’s oldest German company that has recently celebrated 180 years since being founded in the country, Behn Meyer, is scouting prospective AgTech (agriculture technology) and alternative protein technology start-ups in the agriculture-feed-food full value chain for acquisitions or partnerships. Rather than taking part in the typical petrochemical Jurong Island business, Behn Meyer seeks to become an integrated life-sciences company.
More niche segments like green energy or wastewater treatment caught the attention of Jebsen and Jessen, a distributor founded in Singapore. Jebsen and Jessen is equally present in both industrial chemical and specialized markets. The company is open to making acquisitions in the EV batteries space.
Image courtesy of A*STAR