Chemicals industry performance: Roland Berger's new quarterly newsletter

For several years, we have been helping companies in the chemical industry understand and improve their relative financial and shareholder return performance using the Roland Berger Winners' analysis. This year we are launching our first quarterly newsletter to describe the performance of the industry and comment on industry hot topics. Our complete newsletter can be found here.

 A strong year despite macro headwinds

2015 was a strong year for the global chemical industry despite a difficult macroeconomic environment – slow emerging market growth (particularly the slowdown in China and recession in Brazil, low demand from Europe and the sustained decline in oil prices.  

Despite these challenges, industry shareholder returns exceeded S&P 500 by 4 percentage points. Lower raw material prices and the strengthening of the USD against most major foreign currencies caused industry revenues to drop, however the average company saw volumes and long-term assets grow by 2% over 2014 levels, with Commodity chemicals companies leading the pack, spurred by investments in the shale-related investment in the US Gulf Coast.

Commodity and Specialty companies delivered strong shareholder returns (6% and 7% respectively) with strong profitability, while Fertilizer and Agriculture companies saw declining returns.

 On a 3 year timeframe, these focused Commodity and Specialty companies outperformed their Diversified counterparts, confirming the activist hypothesis that focused portfolios create higher shareholder value and are simpler to understand and manage. 

Looking at conventional metrics, we saw that the industry on the whole maintained EBIT dollars and productivity ratios such as working capital as a percentage of sales and asset turnover remained constant. There was a reluctance to take on new debt given the difficult bond market and the macro-economic environment.

 There is only one sustainable path to profitable growth

To better understand the paths that companies can take to achieve profitable growth, we analyzed movements of companies across the quadrants of our Winners' profitable growth matrix between the post crisis 2010-2012 period and the more stable 2013-2015 period. We made the following observations:

• The list of profitable companies did not change much over time – only about a quarter of unprofitable companies traded places with profitable ones
• The list of growing companies saw a higher degree of fluctuation with nearly 40% of players swapping quadrants
• Profitable companies were more likely to achieve or maintain profitable growth than unprofitable companies
• Profitless companies who improved their profitability did so predominantly through organic growth

This analysis leads to three important takeaways:

• Targeting profitability before growth is a more sustainable path for companies. Investors too recognize this, as can be seen from our winners' analysis where 'cash generators' have higher shareholder returns than 'profitless growers'.
• Active portfolio management is crucial. Focused portfolios are easier to manage and communicate to the financial community
• M&A does not solve performance problems. Transactions distract investors and also cover up performance problems, but will rarely help a company move towards profitable growth.

Our Winners and Business Essence growth strategy frameworks will help companies address these challenges strategically. Our next study in our profitable growth series titled "Beware the Similar" will help companies better understand and approach the core, adjacency, and step-out growth strategies.

This is our first quarterly newsletter for 2016; we will continue to analyze each subsequent quarter throughout the year.

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Frederic Choumert is a Principal at Roland Berger, a global strategic consulting firm. Follow him here on LinkedIn.