Despite regional uncertainty in the Middle East and a surge in the price of oil which caused a strain on the chemicals industry, the outlook for global chemicals industry remains positive with revenue growth expected in 2011, according to a latest report by Deloitte.
A new report from Deloitte’s Global Manufacturing Industry group, Compass 2011: Global chemicals sector mid-year outlook, indicated that the chemicals industry is continuing to recover with revenue growing at a compounded annual growth rate of 7.9 percent over the near term. Higher prices and improving global economic conditions, leading to increased demand in the end markets for chemical products, have contributed to the revenue growth. The trend is expected to continue in the second half of 2011.
However, according to the report, the price of oil based feedstock continues to be negatively impacted by the recent wave of uncertainty, which has also placed the chemicals industry in the Middle East under considerable scrutiny. “Despite this uncertainty, which is challenging large Middle Eastern participants differently than in the past, they are responding very robustly, using the considerable resources at their disposal,” said Kenneth McKellar, partner and Middle East Energy and Resources leader at Deloitte.
“If oil prices continue upwards, we will see a race to the bottom in the chemicals sector. Only those companies with the highest liquidity and the most long term perspectives will win through, regionally and worldwide,” Kenneth McKellar, added.
“Contributing to the upswing internationally was the increased global sales in the automotive industry, which is a significant market for chemicals because of the high volume of products used in the development process. Other end markets that have helped drive revenue so far in 2011 were consumer electronics and pharmaceuticals.
Looking ahead, china is anticipated to dominate the global chemical scene with the highest parentage revenue growth for the remainder of 2011. Markets such as India, Brazil, and Korea will follow China closely. While demand in the United States and Europe is expected to be moderate, higher prices will likely translate into stronger revenues for chemical companies in these markets this year.
“China is likely to be a key market for the industry. As domestic demand increases and Chinese chemical companies shift to produce more value added products, profit margins will likely rise,” Tim Henley, Global Chemicals Sector leader, Deloitte Global Manufacturing Industry group, said.
“The current 30 percent spread between oil and natural gas prices per barrel in the United States is creating market advantages for chemical companies with production facilities that are capable of feedstock flexibility,” Henley, added.
“In the long term, the sustainability of this advantage will likely be dependent on shale gas permitting, supply chain infrastructure development, and demand for natural gas in other markets.”
Merger and acquisitions (M&A) activity is a bright spot for the global chemical sector, with 2011 deal volumes and volumes likely to exceed pre-recession figures. China and other developing countries will likely be targets for M&A activity in both the chemical and plastics sectors, which will likely accelerate the rate of deals in 2011.
According to the report, sustainable housing and agriculture are two global megatrends in play this year for chemical companies looking to gain a competitive advantage. Chemical players that are proactively looking to capitalize on megatrends are now focusing their long-term business strategies on solutions that are critical to society. Therefore, research and development (R&D) is a significant way to bring megatrend solutions to market. More chemical producers are recognizing the need for collaborative innovation with other value chain constituents that are just as critically important to the development of solutions for a growing global economy, energy, mobility, urbanization and climate change.
“The global chemicals sector is well positioned for the remainder of 2011 to not only hit revenue forecasts, but also create opportunities to enhance growth in the future,” the report concluded.