Will it be just the fittest that survive?(Leader)

Often attributed incorrectly to Charles Darwin, the term 'survival of the fittest' was coined by British philosopher and sociological theorist Herbert Spencer after reading Darwin's On the Origin of Species. It is particularly applicable to the global chemical industry, which is at a critical moment in its history, and the survivors of the current recession will experience a very different environment in the future. As a result, the chemical industry will experience an unprecedented period of production cutbacks, mergers and acquisitions, restructuring and relocation of their markets and production centres.

Despite signs of recovery led by emerging Asian economies, the American Chemistry Council still forecasts a 6.3% decline in global chemical output during 2009 in its recent mid-year situation and outlook forecast. In the UK, although the chemical market is showing no growth, compared with growth of almost 5% in mid-2008, almost half the companies surveyed recently by industrial analyst Plimsoll Publishing claim to have been largely unaffected, maintaining their financial strength, margins, and even in some cases increasing their sales. The brunt of the slowdown has been borne by around a quarter of the 1000 companies surveyed, which have reported sales declines of up to 15%.

But while demand for chemicals is expected to regain momentum leading to a recovery in 2010 and beyond, it is unlikely to return to pre-recession levels in the near term, according to consultant Deloitte Touche Tohmatsu's Global Manufacturing Industry Group, which has released a report looking at the strategies being followed by chemical companies in response to the current challenges.

'Chemical companies are struggling with how to effectively plan for the future given the market's uncertainty,' said Tim Hanley, vice chairman and US Process & Industrial Products Industry leader at Deloitte. 'Experimenting with new business models that account for new customers and suppliers may be the way to navigate through these challenging times.'

The Deloitte report points out that, with its strong ties to the performance of the automotive and construction sectors, the chemical industry cannot avoid major restructuring over the next few years. By looking at multiple scenarios for the future, Deloitte believes that companies may be able to evaluate a variety of possible outcomes, consider the variables and prepare flexible and profitable responses.

This is echoed by David Pattison at Plimsoll: 'The recession has been a good thing for a number of companies, it has sharpened their management and improved the accountability of the directors, so much so that these reorganisations are already leading to an increase in profitability. However, for those that have yet to come to terms with this changing market, times are tough and they risk falling further behind the successful competition unless they respond to this changing market.'

But as Willem Vaessen, a Deloitte partner who works with chemical companies in the Netherlands, points out: 'It does, however, take a more experienced company to execute this type of plan and effectively synchronise production with market forecasts. Those companies that are struggling and have challenges forecasting future demand are experiencing substantial de-stocking. Once they start re-stocking, we are going to see a stop-and-go phenomenon as pickup in demand resumes.'

One likely result is increased merger and acquisition (M&A) activity, 'resulting in fewer production facilities and a broader geographic footprint, providing more global balance', according to Kevin Gromley, Deloitte's global manufacturing consulting leader. 'Asia's importance to the industry will continue to increase, both from a demand and supply standpoint.'

One challenge is identifying real economic growth as opposed to the impact of the economic stimulus packages that have been announced around the world. As Hanley notes: 'Globally governments have injected $3.6 trillion in total stimulus packages worldwide, with $50bn going to the ailing automotive industry. Also a good proportion of the money in the US and China is going to public service construction projects. It may take some time to make its way to the chemical industry, but we can anticipate the industry may benefit from the stimulus money.'

One area the chemical industry that may feel the benefits is in R&D funding. As Tom Marriott, process consulting leader for Deloitte US, says: 'R&D is an important driver for any chemical company because it paves the way for future revenue growth opportunities. Most of the chemical companies I follow are aware they need to invest in R&D, but they are concerned about the short term and the need to conserve cash.'

Jim Manocchi, director in consulting for Deloitte US, concludes that 'the chemical industry is at a turning point. After this downturn, the world is going to look very different for chemical companies. The weak players are going to be acquired and it will be interesting to see by whom. Will it be the big players or will the industry continue to be fragmented?

'The real winners are going to be those who are truly adaptable. The way companies manage during a downturn is not the way they would manage for growth. They cannot cost-cut their way to prosperity and need to continue to innovate to create new products, develop new value propositions and tap into new markets.'

Neil Eisberg--Editor

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