Consolidation can support growth

Consolidation can support growth

Consolidation `key for petchem sector’

January 2018

Consolidation is a key imperative for the GCC petrochemical industry to remain competitive globally, says a new report published by the Boston Consulting Group (BCG), in collaboration with the Gulf Petrochemicals & Chemicals Association (GPCA).

The report, titled “Consolidation as a Route to Transformation”, explores how consolidation can support growth, value generation and increase the competitiveness of GCC producers.

Mirko Rubeis, partner and managing director at BCG, said: “Multiple market developments – both internal and external – are reshaping the petrochemical industry in the Middle East.

“We believe that consolidation is an effective route to positive transformation for GCC producers,” Rubeis said.

Since the global financial crisis, the M&A in the chemicals industry has risen from a low of $38 billion deals in 2009 to a record of $166 billion in 2017.

Segment consolidation contributed to over 50 per cent M&A deals during this period. Findings of the report recorded that 80 per cent of all global deals originated from North America, Europe and China.

Growth is a key driver for value and a primary contributor to the long-term Total Shareholder Return. Consolidation can support growth and value generation in multiple ways. Some companies grow by consolidating existing segments to become market leaders, and translating this into value — not only in terms of increased market and application coverage, but also with respect to optimisation of site network, cost structure and supplier eco-system.

Companies also consolidate to integrate further down the value chain and capture more value; and as is the case with most value chains, the “value gates” tend to migrate upstream or downstream, and an increased coverage of the value chain provides higher margin stability over time.

Another alternative for companies is to turn to M&A to diversify growth into completely new platforms, including consolidation, and then subsequently carve out businesses to make their portfolios more coherent.

Udo Jung, senior partner and managing director at BCG, said: “Every company aspires to achieve high-value creation for its shareholders, but sustaining high-value creation over extended periods of time poses an even greater challenge.”

“In a slow growth environment, M&A’s provide companies with a potential avenue for growth and a possible avenue to higher earnings and margins,” he added.

The continued oil price environment has reduced the margin advantage that producers in the Middle East have historically enjoyed over their counterparts in Europe and Asia.

Additionally, regional factors like reduced availability of advantaged ethane feedstock in the region, the removal of subsidies on feedstock and utilities, and the limited demand for local chemicals are further compressing margins for GCC producers.

Rubeis noted: “Given the accelerated consolidation we are witnessing in the global petrochemical landscape, this is further increasing the competitiveness of global peers in relation to GCC producers.”

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