Shale gas a catalyst to growth and transformation if U.S. companies shift toward export-led operating model; Rationalized operations and strong cash-on-hand could signal the return of ‘Mega-Mergers’ The past two years have seen a dramatic change in the outlook for U.S. Chemical companies. In 2010, the industry seemed well rationalized, but with few opportunities for significant revenue growth and – outside of R&D – precious little expansionary investment. However, with the commercialization of shale gas in the U.S., the industry has seen a remarkable turn of fortune, according to a KPMG report, The Future of the U.S. Chemical Industry.
According to KPMG’s chemical industry specialists, the outlook for U.S. Chemical companies feels overwhelmingly upbeat. With a new and abundant source of low-cost feedstock, the U.S. market has suddenly transformed to become one of the most advantageous markets for chemical production in the world.
However, according to KPMG, there remain a number of risks on the horizon. The first – and likely most problematic – is that the exponential addition of new capacity in the Chemical industry will lead to an oversupply that outstrips demand within the national market, returning the industry to the cyclicality that was such a problem in the past. Tied to this are the growth projections for global Chemical sales. While the U.S. economy has returned to growth, overall it remains a mature market which could not absorb all of the announced new capacity. Similarly, Europe and Japan have seen somewhat sedate growth, while the emerging markets have boomed ahead with China, India and Latin America in the lead.
“Clearly, U.S. Chemical companies will need to place strong focus on developing their supply lines into the new growth economies, and this will require a significant transformation of operating models for U.S. companies who have traditionally been focused on the domestic marketplace.” said Mike Shannon, global and U.S. leader of KPMG’s chemicals and performance technologies practice. “The opening up of many emerging markets to import growth can be a slow and complex process, and U.S. chemical companies need to take actions today that will guarantee markets for products to be produced in four or five years time.”
The miracle of shale gas
According to KPMG’s Shannon, “one would be hard pressed to overestimate the impact of the commercialization of shale gas on the U.S. Chemical Industry.” At its root, the discovery of abundant reserves of shale gas in the U.S. has driven down the natural gas price and created a massive competitive advantage for U.S. companies. The cost implications for the U.S. Chemical industry have been impressive. Generally, a ratio of 5-1 between crude oil and gas prices is enough to make the U.S. Chemical environment ‘favorable’. At today’s prices, the disparity is more like 9-1, creating lasting advantages for U.S. producers.
Despite the ongoing regulatory debate, the commercialization of shale gas has already heralded in a new era of growth and prosperity for the U.S. chemical industry. And while some risks still remain on the horizon, there is little doubt that the U.S. industry is embarking on a path that will lead to massive competitive advantage and significant transformation within the industry itself.
“To fully benefit from the historic opportunity afforded by shale, U.S. chemical companies must make significant investments in supply chains, overseas sales and potentially joint ventures with emerging market producers to ensure they have captive markets for the new shale-related capacity due on-stream,” Paul Harnick, KPMG’s global COO for the chemicals and performance technologies practice.
Efficient, Cash-strong companies eyeing Mergers & Acquisitions for Growth
Chemical companies have spent much of the past four years examining a range of other cost cutting measures within the organization. This cost cutting and operating efficiency combined with the impact of cheap gas feedstock has driven profitability and cash generation across the industry. The environment of economic uncertainty and a strong desire to achieve financial flexibility in the face of continued market turbulence has led many of the top U.S. chemical companies to build up significant war chests and financial reserves that are now being cracked open to enhance shareholder value and take advantage of synergies in the market.
KPMG’s Shannon adds that “U.S. chemical companies have started to focus on optimizing their portfolios and combining complimentary/supplementary product slates that will provide stronger revenue streams and/or access to new markets. This creates an environment ripe for M&A activity.”
According to KPMG’s Future of the U.S. Chemical Industry, the growth prospects for U.S. chemical companies is almost entirely dependent on their ability to extend their footprints into high growth markets. Failing that, the U.S. market is destined to fall back into the historic cycle of oversupply followed by rationalization. If they can overcome these challenges, U.S. chemical companies can look forward to an exciting era marked by rapid growth and sustainable competitive advantage in the near and medium-term.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International.”) KPMG International’s member firms have 145,000 people, including more than 8,000 partners, in 152 countries.