Tuesday, June 6, 2017

The chemicals industry has lost its future

In the 1967 coming-of-age film The Graduate, the alienated hero Ben Braddock, played by Dustin Hoffman, is taken to one side at a California party and given career advice by a friend of his parents. “Plastics . . . There’s a great future in plastics. Think about it,” says Mr McGuire. The scene is meant to convey the horrible claustrophobia of bourgeois life but Mr McGuire was right: there was a great future in plastics. The industry of the 1960s was filled with innovation: materials from Kevlar to Gore-Tex were being invented and Neil Armstrong walked on the moon in boots with Dow Corning silicone rubber soles. The film’s poster showed Mrs Robinson, Ben’s seductress, drawing up one leg a stocking made of silk or perhaps DuPont’s Nylon. Artificial materials refined from oil and gas were replacing silk and cotton in clothing and being adopted for all kinds of industrial and medical products. Ben would have been wise to heed Mr McGuire. Markets now offer the opposite lesson: there is not a great future in chemicals. If there were, then companies such as Dow Chemical, DuPont, Evonik and ChemChina would not be involved in a series of mergers, the biggest wave of restructuring since conglomerates spun off their pharmaceutical divisions in the 1990s. Growth and innovation — the future that Mr McGuire recommended as chemical engineering came into its own in the 1960s — are in short supply. Instead, balance sheets are bulging with cash for which chief executives have struggled to find uses. Corporate raiders, also known as activist hedge funds, are knocking on the door. The elements have combined at Akzo Nobel, the Dutch paints and speciality chemicals maker, which has rebuffed takeover attempts by PPG, founded in 1883 as Pittsburgh Plate Glass. Elliott Management, the hedge fund, this week lost a legal battle to eject Antony Burgmans as Akzo’s chairman. Delve inside chemicals conglomerates and you will find many venerable names. Akzo includes the old Imperial Chemical Industries, which split itself 25 years ago into ICI and Zeneca, the pharma group that is now part of AstraZeneca, under pressure from Hanson, a conglomerate raider. This merger boom carries an echo of those days. Companies such as ICI and Hoechst spun off pharmaceuticals and agrochemicals to unleash them from the low-margin business of refining chemicals from ethane and naphtha. Their successors are reshuffling again, with complex materials and speciality chemicals as the new hopes. It has more to do with financial engineering than chemical engineering. The giant leaps of the past have given way to smaller steps. There is plenty of activity in laboratories, where scientists are developing materials from brake fluids to emulsifiers and thermoplastics, but these are incremental advances. This has been dubbed a “game of inches” by McKinsey, the consultancy. “With the exception of innovative crop protection, we would be hard pressed to name a single chemical blockbuster developed in the last 10 years,” wrote a group of partners in March. It is a result of success: buildings, aircraft and cars are stuffed with materials from recent decades. “Everything you see when you drive a car, from plastics to polymers and batteries, comes from chemicals,” says Mike Shannon, KPMG’s global head of chemicals. That creates a big market but not one with exciting prospects. US companies have invested heavily in commodity refining — trying to profit by cracking ethylene from cheap shale gas. Saudi Aramco is adding to global overcapacity by forming a joint venture with Dow Chemical to build a $20bn manufacturing complex in Jubail. The combination of a capacity glut and an innovation drought has turned chemicals companies into unstable compounds. They are pulled into merging by having to cut costs in commodity operations, while being pushed towards more specialisation. They often seek to do both things at once. Dow Chemical and DuPont launched their merger in 2015 with a plan to split the amalgamated company into three divisions. That was not precise enough for Third Point, the aggressively activist US hedge fund, which this month pushed it to divide into six parts, including spinning up to four companies out of its speciality chemicals arm. Dow and DuPont’s independent directors have promised to rethink after the merger is completed but there is no longer a clear answer to the question of how to structure a large chemicals company. The options range from placing thousands of products within a single corporate entity to putting bundles of them into their own enterprises. This promises plenty of work for consultants and bankers, merging and dividing companies long into the future. It is only a means to an end for hedge funds, though; the underlying purpose of Third Point’s intricate restructuring is that it wants Dow and DuPont to hand $40bn back to their shareholders within two years of merging. It is enough to make one long for the era when Dow was Dow, ICI was ICI, corporations were simpler, and there was more of a future in chemical engineering than financial. Think about it.

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