Asia Competition BarometerPetrochemicals and chemicalsAn Economist Intelligence Unit reportSupported by
Asia Competition Barometer:                                                                                         Petroc...
Asia Competition Barometer:    Petrochemicals and chemicals    Preface    Supported by Singapore’s Economic Development Bo...
Asia Competition Barometer:                                                                               Petrochemicals a...
Asia Competition Barometer:    Petrochemicals and chemicals    •	The number of players in Asia’s PeC sector has risen sinc...
Asia Competition Barometer:                                                                                               ...
Asia Competition Barometer:                                 Petrochemicals and chemicals                                 t...
Asia Competition Barometer:                                                                                Petrochemicals ...
Asia Competition Barometer:                                   Petrochemicals and chemicals                                ...
Asia Competition Barometer:                                                                                               ...
Asia Competition Barometer:     Petrochemicals and chemicals        When revenue growth slowed as a result of the crisis, ...
Asia Competition Barometer:                                                                                       Petroche...
Asia Competition Barometer:                                          Petrochemicals and chemicals Commodity prices        ...
Asia Competition Barometer:                                                                                               ...
Asia Competition Barometer:                              Petrochemicals and chemicals                              PetroCh...
Asia Competition Barometer:                                                                                          Petro...
Asia Competition Barometer:     Petrochemicals and chemicals     Outlook     T   he PeC market in Asia has grown steadily ...
Asia Competition Barometer:                                                                                Petrochemicals ...
Asia Competition Barometer:                                 Petrochemicals and chemicals                                 •...
Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. ...
Asia Competition Barometer: Petrochemicals and chemicals
Upcoming SlideShare
Loading in...5
×

Asia Competition Barometer: Petrochemicals and chemicals

722

Published on

Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009.

This report focuses on the Barometer findings for the petrochemicals and chemicals manufacturing (PeC) sector. Assessing a universe of over 550 PeC companies that are publicly listed in eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the sector.

The Barometer has two dimensions: profitability and market concentration. To assess the aggregate profitability of the PeC sector in Asia, the EIU developed a composite index of five ratios that each represents a different aspect of a company’s profitability. To assess market concentration, the EIU calculated the Herfindahl-Hirschmann Index (HHI) for the PeC sector in Asia from 2004 to 2009. A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as the sum of the squares of the market shares of the 50 largest firms from the universe of over 550 listed companies assessed.

Other reports in this series look at the information technology services, pharmaceuticals, precision engineering, and transport and logistics sectors in Asia.


Published in: Business, News & Politics
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
722
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
38
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Asia Competition Barometer: Petrochemicals and chemicals

  1. 1. Asia Competition BarometerPetrochemicals and chemicalsAn Economist Intelligence Unit reportSupported by
  2. 2. Asia Competition Barometer: Petrochemicals and chemicals Contents Preface 2 Executive summary 3 Asia’s growing importance for corporate performance and global competitiveness 5 Competition and profitability at Asian firms 8 Competition: Declining since 2008 8 Profitability: Slight overall decline 10 Commodity prices 12 Case study: Tata Chemicals 12 Positioning for success in Asia 13 Asia remains vital both as a market and as a production source 13 Evolving supply chains and partnerships 14 Case study: BASF 15 Outlook 16 Barometer methodology 17© The Economist Intelligence Unit Limited 2012 1
  3. 3. Asia Competition Barometer: Petrochemicals and chemicals Preface Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009. This report focuses on the Barometer findings for the petrochemicals and chemicals manufacturing (PeC) sector. Assessing a universe of over 550 PeC companies that are publicly listed in eight countries— China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the sector. Other reports in this series look at the information technology services, pharmaceuticals, precision engineering, and transport and logistics sectors in Asia. February 20122 © The Economist Intelligence Unit Limited 2012
  4. 4. Asia Competition Barometer: Petrochemicals and chemicalsExecutive summaryW hat does the emergence of Asia as a major engine of global economic growth mean for companies operating in the region? Asia’s robust economic outlook—coupled with diminished growth prospectsin many other parts of the world—has attracted new investment into the market both from regional playersand Western multinationals (MNCs). As a result, competition in the region is expected to intensify. Giventhe darkening global economic outlook, and the expected impact on some economies and sectors in theregion, growth and profitability look uncertain in the near term. But over the medium to longer term,Asia’s strong economic fundamentals will ensure consistent growth across a range of industries. How arecompanies positioning themselves to capitalise on Asia’s growth opportunities over the next few years? The Asia Competition Barometer assesses the intensity of competition and changing market dynamicsin several key sectors. This report examines the petrochemicals and chemicals manufacturing (PeC)sector, which includes: basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubberin primary forms, pesticides and other agrochemical products, paints, varnishes and similar coatings,printing ink and mastics, soap and detergents, cleaning and polishing preparations, perfumes and toiletpreparations, explosives, other chemical products and man-made fibres. Among the key findings of this report are the following: • Asia’s PeC sector has been expanding rapidly, in line with the region’s stellar economicgrowth. Several broad macroeconomic trends, including Asia’s emergence as a global manufacturingpowerhouse, have boosted demand for PeC products and services in the region, and will continue todo so. In particular, demand from the consumer goods, agriculture, automotive and constructionsectors will drive the region’s PeC sector. Meanwhile, the increasing global and regional emphasis onsustainable development and alternative energy sources will create new potential markets for PeC firms.The industry is expected to grow at a compound annual growth rate of 10.5% between 2010 and 2015, bywhen it will be worth some US$2.6trn, according to Datamonitor, a research firm.© The Economist Intelligence Unit Limited 2012 3
  5. 5. Asia Competition Barometer: Petrochemicals and chemicals • The number of players in Asia’s PeC sector has risen since 2004, though recent consolidation suggests that this growth may be moderating. The number and size of publicly-listed firms in the PeC sector in Asia has increased dramatically, from 376 firms in 2004 to 549 in 2009. Total combined revenues more than doubled from US$113.2bn to US$256.3bn during the period. However, with ongoing consolidation the growth in the number of firms may be moderating—from 2008 to 2009, the number of publicly-listed PeC companies in Asia actually declined from 559 to 549. Meanwhile, in recognition of Asia’s increasing importance to the global PeC sector, foreign MNCs have been building up their presence in the region. The latter are increasingly viewing Asia not only as a key market but also a vital source of production. • Competition has decreased marginally, and large players are growing stronger. Competition in the PeC industry grew slightly between the years 2004 and 2007, largely due to an influx of new players into the sector. However, between 2007 and 2009 the largest firms in the industry began to steadily increase their market share, partly by exploiting economies of scale. With ongoing consolidation in the industry it seems likely that the bigger firms, with resources to invest in research and development, and seek out lower-cost sources of feedstock and energy, will continue to grow in dominance. • Despite a slight overall decline, profitability in the sector has remained relatively resilient. Profit margins for the PeC industry in 2009 have fallen slightly relative to 2004, and have generally fluctuated broadly in tandem with global economic growth. The average gross margin of publicly-listed Asian firms declined from 21.5% in 2007 to 18.4% in 2008. This was largely due to a slowdown in demand amid the global economic downturn, and a spike in the cost of raw materials, such as oil, that year. The average gross margin then bounced back to reach 21.4% by 2009. This was partly because of industry consolidation— when revenue growth slowed as a result of the crisis, the smaller players could not keep pace with large MNCs and state-owned companies, who were able to further exploit economies of scale and grow their market share. In the coming years, profitability will be largely dependent on innovation, the ability to tap into markets that are relatively underpenetrated, and access to resources. • Access to resources has displaced low labour costs as the key driver of competitive advantage, disrupting traditional industry supply chains. In a sector with little product differentiation, one of the biggest profitability drivers is preferential access to low-cost energy and raw materials such as oil, natural gas, water, metals and minerals. Industry supply chains are hence being reworked to tap resources in places such as the Middle East. As a result, the sector is also seeing an increasing number of partnerships between MNCs with global networks and technological know-how, and local players, including state-owned firms, with access to resources. Following steep rises in 2010-11, the EIU expects the prices of oil and non-oil commodities to moderate somewhat in 2012-16. Nevertheless, PeC firms will continue to compete fiercely for access to these resources, particularly given the supply constraints in many commodity markets.4 © The Economist Intelligence Unit Limited 2012
  6. 6. Asia Competition Barometer: Petrochemicals and chemicalsAsia’s growing importance for corporateperformance and global competitivenessO ver the past decade, Asia has rapidly grown in importance to the global economy. Its share of global GDP, measured in purchasing-power parity terms, increased from 26.8% in 2001 to 33.8% in 2010.1By 2016, the Economist Intelligence Unit (EIU) expects this proportion to rise to 38.9%. 1 Asia here includes Bangladesh, China, Hong Kong, Indonesia, India, There are several broad trends that have been driving Asia’s petrochemicals and chemicals Japan, South Korea, Malaysia, Myanmar, Philippines,manufacturing (PeC) sector.2 The first is Asia’s emergence as a global manufacturing powerhouse. Over Pakistan, Singapore, Sri Lanka, Thailand, Taiwan, andthe past decade, Asia’s share of global manufacturing output has increased dramatically, led by China (see VietnamFigure 1). This has boosted demand for PeC products that are used as raw materials for the manufacture of a 2 The PeC sector includes thevariety of goods. following sub-segments: basic chemicals, fertilisers and The second trend, which is helping to underpin the first, relates to rising private consumption in Asia, nitrogen compounds, plasticswhich is boosting regional demand in a number of sectors, from automobiles and consumer goods to and synthetic rubber in primary forms, pesticides andconstruction, pharmaceuticals and food. Due to Asia’s rapid economic growth over the last few years, the other agrochemical products, paints, varnishes and similarregion is now home to a huge and growing middle class. The Asian Development Bank (ADB) estimates coatings, printing ink and mastics, soap and detergents, cleaning and polishingFigure 1: Share of world manufacturing output preparations, perfumes(%, constant 2000 US$) and toilet preparations, 2000 2009 explosives, other chemical15 products and man-made fibres.12 9 6 3 0 China ASEAN South Korea Taiwan IndiaNote: ASEAN here comprises Indonesia, Malaysia, The Philippines, Singapore, Thailand and VietnamSource: UNIDO© The Economist Intelligence Unit Limited 2012 5
  7. 7. Asia Competition Barometer: Petrochemicals and chemicals that between 1990 and 2008 developing Asia’s middle class population more than tripled from 565m to3 “The rise of Asia’s middle 1.9bn. As a share of the total population, it grew from 21% to 56% over that period.3class”, Asian DevelopmentBank, 2010 These new consumers have been spending on products such as cars and houses, which rely directly on the PeC sector for inputs. Asia has some of the fastest growing automobile markets as well as some of the largest automobile manufacturers in the world. In 2009, China overtook the United States as the world’s biggest car market. Between 2011 and 2015, the EIU expects Asia to see 157.5m more passenger vehicles and 54.7m more commercial vehicles on its roads. Rising vehicle sales have a direct and noticeable impact on PeC sector performance, with a lag of about six months, according to Ramakrishnan Mukundan, the managing director of Tata Chemicals, an Indian chemicals manufacturer. On average, the production of one car requires about 155kg of polymers and other chemicals,4 “Global chemical industry valued at about US$2,300.4 Examples of chemical products used in automobile manufacturing includerecovers, but an automotiveshift to Asia will pose more polypropylene, polyethylene, polycarbonate, polyvinyl chloride, polyester fabric, adhesives, primers,challenges”, ICIS, March 22nd powder coatings, surface coating materials, paints and metal handling and polymer adhesives. They2010 are used in a whole variety of ways including dashboards (vents, gauges, dials and panelling), steering wheels, seats (armrests, headrests, foam), coatings for the outside of the vehicle, tyres, and foam for roofing, among others. Rising incomes in Asia have also led to a boom in the region’s construction sector, which uses a range of PeC inputs, including cellulosics, whose market grew by 15% in 2011. “New construction is mainly driven by infrastructure and housing needs of countries with strong migration movements of young populations into urban economic centres,” Tilman Krauch, head of BASF’s construction chemicals5 “Urbanization trend boosts division, was quoted as saying.5construction chemicalsmarket”, ICIS, July 9th 2010 The world market for construction chemicals is expected to grow at an annual average of 5% per annum6 Cited in “Chemicals and from US$30.7bn in 2009 to US$39.2bn in 2014, according to SRI Consulting.6 China will account forConstruction: Building a much of this growth, with its market expanding by an annual average of 9% per annum from US$7.9bnFuture Together”, KPMG, June13th 2011 to US$12.1bn over that period. To meet the growing demand, global companies are investing in Asia.7 “Dow plans to expand American firm Dow Construction Chemicals, for instance, plans to expand its cellulosic productioncellulosic production capacity capacity in Asia.7in Asia-Pacific”, Chemicals-technology.com, Dec 12th In the area of infrastructure, many Asian economies, despite years of rapid growth, still face huge2001 infrastructure deficits. As a result, there is much public and private spending on roads, ports, bridges and other infrastructure, all of which require PeC inputs for their construction. Asia’s growing food consumption is another demand booster. According to Mr Mukundan, agriculture and farm-related chemicals is the segment showing the “most robust growth” in terms of profitability. “The margin structures of fertiliser companies have been in keeping with food prices,” he adds. A third trend that will drive the PeC industry is the growing emphasis on sustainable development and alternative energy sources. Chemical producer BASF sees “strong potential in solutions that contribute to sustainable development,” says Albert Heuser, the firm’s president for market and business development in Asia Pacific. For instance, BASF estimates that by 2020 the global market for its wind power products— including epoxy systems, core foams, advanced coatings and hydraulic fluids—will be worth some €300m (US$390m). Much of this segment’s growth will come from China, which is already the world’s largest wind power market.6 © The Economist Intelligence Unit Limited 2012
  8. 8. Asia Competition Barometer: Petrochemicals and chemicals The fourth trend is growing demand for potable water. Millions of people, particularly in countriessuch as India, do not have access to safe drinking water. Mr Heuser identifies water products and servicesas a key growth segment. BASF believes it can capture around €800m (US$1bn) of the estimated €20bn(US$26bn) global water treatment and purification market. Foreign PeC firms have been operating in Asia for several decades. Recently, in recognition of Asia’sgrowing importance, they have been investing heavily in the region. Between January 2004 andDecember 2011, fDi Markets, a research house, recorded a total of 1,512 projects in Asia. Most of thoseinvestments originated from the US (24% of the investment projects), Japan (24%) and Germany (15%).The top three investment destination markets were China (48% of the investment projects), India (14%)and Thailand (6%). About one-third of these foreign investments were focussed on production forregional markets.© The Economist Intelligence Unit Limited 2012 7
  9. 9. Asia Competition Barometer: Petrochemicals and chemicals Competition and profitability at Asian firms T he number and size of publicly-listed firms in the PeC sector in Asia has increased dramatically, by 46% between 2004 and 2009, from 376 firms to 549. Over the same period, the total combined revenue of publicly-listed PeC companies more than doubled from US$113.2bn to US$256.3bn; these firms’ combined total assets rose from US$104.2bn to US$254.2bn. Competition: Declining since 2008 With many companies raising their expectations of Asia to deliver growth and profits, it is reasonable to expect competition intensity in the region to increase. To capture this intensity we have used the Herfindahl–Hirschman Index (HHI), which measures the market concentration of an industry’s largest firms. HHI values can range from 0 (extremely fragmented market) to 1.0 (monopoly). Here we have multiplied the values by 100 to achieve a scale consistent with profitability indicators (see below). The HHI for Asia’s PeC industry increased slightly from 8.27 in 2004 to 8.48 in 2009, signifying that the 50 biggest firms in the Barometer saw a marginal increase in concentration between 2004 and 2009 (see8 A measure of the size of Figure 2).8companies in relation to theindustry, and an indicator of Competition in the PeC industry grew between the years 2004 and 2007. The HHI dropped from 8.27the amount of competition to 7.52 over that period, signifying that the market share of the 50 biggest firms declined. This is largelyamong them, the HHI isdefined as the sum of the because of an influx of new players into the sector—in those two years, 157 new Asian companies enteredsquares of the market sharesof the 50 largest firms from the industry, capturing much of the rapidly growing market.the universe of over 200 listed However, between 2007 and 2009, the largest firms in the industry began to steadily increase theircompanies assessed. For moreinformation on the Barometer concentration once again. The HHI rose from 7.52 to 8.48 over that period. This is mostly becausemethodology, please refer tothe last section in this report. of the global economic slowdown’s impact on smaller firms in the region, and the resulting industry consolidation. Profitability in the PeC sector in Asia declined significantly in 2008 (see next section for more details), hurting smaller companies in particular. Larger companies, who were flush with cash and had greater8 © The Economist Intelligence Unit Limited 2012
  10. 10. Asia Competition Barometer: Petrochemicals and chemicals Figure 2: Herfindahl–Hirschman Index 9.0 8.5 8.0 7.5 7.0 2004 2005 2006 2007 2008 2009 Source: Economist Intelligence Unit 2004 2005 2006 2007 2008 2009 Herfindahl—Hirschman Index (HHI) 8.27 7.90 7.65 7.52 7.54 8.48 flexibility to adjust production, were better able to weather the storm. From 2008 to 2009, the number of publicly-listed PeC companies in Asia actually declined from 559 to 549. Mr Mukundan says that before the 2008-09 economic slowdown, several firms made big investments based on how they expected PeC supply chains to evolve. “Some of these bets have gone wrong due to insufficient data, some due to inaction and some simply because of the way the markets turned,” he says. Tata Chemicals used the crisis to examine its cost structures. It decided to close a manufacturing plant in the Netherlands, and then acquired a salt business in the UK. “Companies that sharpened their focus on cash came out with better balance sheets,” says Mr Mukundan. Many firms were able to bounce back from the recession as “a lot of the belt-tightening happened fairly quickly”. Mr Mukundan believes that segments in the PeC sector are becoming more commoditised and the “space to add an intangible or service component is getting shaved quickly”. With the exception of a few cleaning agents, most PeC products are used as raw materials for the manufacture of other products. As there is little differentiation in these products, economies of scale are important. Figure 3: Top ten companies by turnover Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn) Indian Oil Corporation India 30.02 56.62 Reliance Industries India 15.14 47.6 Thai Oil Public Company Thailand 6.16 9.48 Sinopec Shanghai Petrochemical China 5.88 7.21 Mangalore Refinery and India 0.41 7.07 Petrochemicals Shanghai Material Trading China 1.3 6.91 Chennai Petroleum Corporation India NA 5.6 IRPC Public Company Thailand 5.14 5.51 Hindustan Unilever India 2.41 4.04 Bangchak Petroleum Thailand 2.65 3.61 Note: These are the ten biggest companies by turnover that were analysed in the Barometer, which considered only publicly listed firms in eight countries: China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam© The Economist Intelligence Unit Limited 2012 9
  11. 11. Asia Competition Barometer: Petrochemicals and chemicals When revenue growth slowed as a result of the crisis, the smaller players could not keep pace with large MNCs and state-owned companies. To compete in today’s climate, Mr Mukundan says companies need to focus on being cost-competitive and to invest in innovation. “Both of these are quite critical and companies that do both or at least one of these are ones that have tended to gain market share,” he says. The smaller players, he adds, have had a tough time and only a few of them have adapted well enough. Consolidation has led to the creation of even larger firms with multiple capabilities. The three largest companies by 2009 turnover (see Figure 3)— Indian Oil Corporation, Reliance Industries and Thai Oil Public Company —together account for almost half of the industry’s combined revenues. Mr Heuser at BASF says that larger firms have “a clear edge” over the competition as they can build on their existing global research and development (R&D) platforms. Nevertheless, rivalry among the largest PeC firms remains extremely strong, and competition between them is likely to increase. Profitability: Slight overall decline To measure the profitability of the PeC sector, we developed a composite index of five ratios that measures different aspects of a company’s margins (for more details, see the note on methodology at the end of this report). All profit margins for the PeC industry in 2009 have fallen slightly relative to 2004 (see Figure 4). Nevertheless, profitability has remained relatively resilient. After hitting a low of 80.3 in 2008, the Profitability Index recovered to 105.0 in 2009, slightly lower than the level of 117.0 in 2004. In other words profitability has not fallen consistently, but has fluctuated broadly in tandem with global economic growth (see Figure 5). From 2005 to 2007, profitability rose slightly, before a steep Figure 4: Profitability Index 120 110 100 90 80 2004 2005 2006 2007 2008 2009 Source: Economist Intelligence Unit 2004 2005 2006 2007 2008 2009 Profitability index 117.0 100.0 106.2 115.7 80.3 105.0 EBITDA margin (%) 16.637 14.214 15.097 16.442 11.420 14.920 Gross margin (%) 12.7 10.6 9.8 12.4 7.9 11.4 Return on capital employed (%) 24.1 20.2 23.3 21.5 18.4 21.4 Return on equity (%) 14.4 12.9 13.2 16.6 9.3 13.2 Return on assets (%) 16.4 14.8 15.1 20.3 9.1 14.8 Herfindahl—Hirschman Index (HHI) 8.27 7.90 7.65 7.52 7.54 8.4810 © The Economist Intelligence Unit Limited 2012
  12. 12. Asia Competition Barometer: Petrochemicals and chemicalsFigure 5: Global GDP(% real change p.a.) 5 4 3 2 1 0-1-2-3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Source: Economist Intelligence Unitdecline between 2007 and 2008, a direct reflection of the gathering financial storm at the end of2007 that depressed global demand.9 As much of the developed world entered a recession, exports of 9 The composite Profitability Index is made up of fivemanufactured goods from Asia to the West contracted sharply. This had a direct impact on profitability in ratios that each representsAsia’s PeC sector. a different aspect of a company’s profitability. For Raw material costs were also a factor in profitability. While overall revenues of the firms in the Index more information on the Barometer methodology,increased in 2008, the cost of raw materials, such as oil, natural gas, water, metals and minerals, rose please refer to the last sectioneven more. Asian companies saw their average gross profit margin fall from 21.5% in 2007 to 18.4% in in this report. 2008. The price of oil peaked in mid-2008, the year profitability fell most. Mr Mukundan at Tata Chemicalssays that the prices of several other inputs, such as rock phosphate, urea and ammonia, all hit a peak in2008 “as traders were flipping these assets in a hurry”. Profitability bounced back in 2009 as emerging Asia’s economies began to grow rapidly again. Asiaex-Japan saw real GDP growth of 5.2% that year. Meanwhile, raw material costs declined sharply. Finally,industry consolidation would have improved the allocation and average productivity of assets, as somesmaller firms shut, and some larger firms were able to grow their market share. In the coming years, profitability will largely be dependent on innovation and the ability to tap intomarkets that are relatively underpenetrated. Most importantly, according to Mr Mukundan, is the need forcompanies to secure access to low-cost raw materials and energy. The EIU expects the prices of oil and industrial raw materials to moderate over the next few years (seeBox: Commodity prices).© The Economist Intelligence Unit Limited 2012 11
  13. 13. Asia Competition Barometer: Petrochemicals and chemicals Commodity prices euro zone could be expected to lead to dramatic falls in commodity prices, given that it would most likely have severe consequences for global growth. After sharp falls in the final quarter of 2011, commodity prices On average, prices are expected to be weaker in 2012, owing to generally have had a strong start to 2012, buoyed by data releases slower consumption growth and, depending on the commodity, showing more positive growth trends in both China and the US and some improvement on the supply front. A stronger US dollar will also some tentative signs that the euro zone debt markets will avoid be negative for commodity prices. However, loose global monetary widespread defaults. Oil prices, in particular, have been strong owing conditions and a loss of confidence in sovereign creditworthiness, to supply concerns related to civil unrest in Nigeria and tensions which is encouraging investors to seek returns in real assets, will offer between Iran and the West. Prices will remain hostage to sentiment some support to prices. With global demand set to stabilise in 2015-16, surrounding the outcome of the euro zone crisis and global economic commodity prices are expected to nudge higher. prospects in early 2012. A marked deterioration in the outlook for the Figure 6: Commodity price forecasts 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Oil prices Brent; US$/b 72.71 97.66 61.86 79.63 111.01 110.00 103.63 108.25 104.00 110.00 Non-oil commodities* % change in 20.8 12.2 -22.4 24.0 26.3 -12.2 -1.9 -3.6 3.4 2.8 US$ prices * Index includes Beverages, Grains, Oilseeds, Sugar, Metals, Fibres and Rubber Source: The Economist Intelligence Unit, Feb 10th 2012 Case Study: Tata Chemicals with firms that have access to lower costs in the form of cheaper energy or access to raw materials.” As such, PeC firms are looking to partner with other companies that have complementary skills or competitive Tata Chemicals: Competing to secure raw materials and energy advantages. Tata Chemicals, one of India’s largest chemical companies, saw its Over the next few years, Mr Mukundan expects PeC firms to compete annual revenues quadruple from US$674m in 2004 to US$2.9bn in across three dimensions. “The first is a large focus on sustainability. 2008, before falling slightly to US$2.1bn in 2009, during the global The second issue is innovation. The third is how companies can economic downturn. implement the first two in order to harness what is referred to as the “We are very fortunate that our home market is Asia,” says market at the bottom of the pyramid,” he says, referring to emerging Ramakrishnan Mukundan, the firm’s managing director. “If you look markets in Asia, Latin America and Africa. In this regard, Asian at the past and the immediate future, the bulk of profit growth and companies have an advantage as “they have a touch and feel” of this the bulk of new segment growth in terms of products are happening market. Mr Mukundan believes these three factors will be the key in Asia.” Even though Europe and North America continue to lead in a drivers of profitability. few manufacturing segments, such as high-end pharmaceuticals, Mr However, Mr Mukundan stresses that underlying the three Mukundan believes that Asia is closing the gap, driven partly by rapid dimensions of competitiveness—innovation, sustainability and developments in the region’s regulatory frameworks. untapped markets—is preferential access to energy and feedstock. Mr Mukundan believes that competition in the PeC sector has “Firms have to reach out and get that advantage,” he says, pointing out changed with greater consolidation in the market. “It has led to that these input cost arbitrage opportunities have grown over the last the creation of larger firms that have multiple capabilities,” says Mr few years. Mukundan. “Firms with market access have been acquiring or merging12 © The Economist Intelligence Unit Limited 2012
  14. 14. Asia Competition Barometer: Petrochemicals and chemicalsPositioning for success in AsiaAsia remains vital both as a market and as a production sourceG iven the long-term structural problems in many Western markets and emerging Asia’s largely bullish economic fundamentals, the shift in trade and investment from the West to Asia will continue. TheEIU estimates that by 2016 the eight Asian countries in this study alone will account for 28.9% of globalGDP (measured in purchasing-power parity terms), up from 23.2% in 2010. Growing regional demand for a range of products, from automobiles to houses, will drive Asia’s PeCsector. It is expected to grow at a compound annual growth rate of 10.5% between 2010 and 2015, bywhen it will be worth some US$2.6trn, according to Datamonitor, a research firm. China’s market alonewill account for about US$1.4bn. Global PeC firms are increasingly viewing Asia not only as a key market but also a vital source ofproduction. BASF estimates that emerging markets will be responsible for 54% of global chemicalproduction (excluding pharmaceuticals) by 2015 and almost 60% by 2020, with China alone accountingfor 30% of global production in that year (seeFigure 7). Figure 7: Global chemical production (excluding pharma) (Trillion $, real 2005) The key question for foreign players is how World Developed markets* Emerging markets 3.0 Thereof Chinathey will position themselves in Asian markets to ~3.1 2.5 .take advantage of this global shift in the chemical 4.0% p.a ~ 2.0 p.a. ~2.1 ~1.8industry. There are a number of large Asian local 3.2% 1.5 ~ ~ 1.4companies already active in this space; several ~1.3 1.1 ~1.2 1.0 1.0 0.9of them, such as Oil and Natural Gas Corporation 0.5 0.4 ~60%(ONGC) and Indian Oil Corporation in India, ~45% 0.0 ~40%Petronas in Malaysia, and China Petroleum and 1995 2010 2015 2020Petrochemical Corporation (Sinopec), China * BASF definition: Developed markets include EU15, Norway, Switzerland, North Amercia, Japan, Australia, New Zealand. Source: BASFNational Oil Offshore Corporation (CNOOC) and© The Economist Intelligence Unit Limited 2012 13
  15. 15. Asia Competition Barometer: Petrochemicals and chemicals PetroChina, are state-owned enterprises. Their local knowledge and close government ties offer them an advantage against foreign competition. Chinese PeC firms, for instance, have been able to secure supplies of crude in places such as Africa largely because of their government’s financial and political backing. Similarly, Petronas enjoys a virtual monopoly in Malaysia. It has the rights to all of Malaysia’s hydrocarbon reserves. Faced with these challenges, private sector PeC firms have for years been entering into partnerships with these state-backed incumbents, offering them skills and technology in return for access to raw materials. As hydrocarbon reserves dwindle, and as these private sector firms find it harder to secure the raw materials they need, these partnerships are likely to grow in number and scope. Evolving supply chains and partnerships The scramble for access to raw materials and energy is already having an impact on supply chains. These specific input price differentials far outweigh any additional labour costs. For instance, Middle Eastern companies producing fertiliser now have a crucial competitive advantage because of their access to cheap natural gas in the region. Moreover, it is no longer a matter of Asian state-owned enterprises teaming with largely Western MNCs. Asian companies are looking outside the region. Tata Chemicals, which has manufacturing facilities in Asia, Europe, North America and Africa, has its largest production centre in the US—energy costs there are relatively low, and the country has the world’s largest deposits of trona, which is used in the production of soda ash. Logistics are also evidently more important than low costs. In Asia, global firms are establishing key production sites not only close to feedstock sources, but also at locations which provide good access and connectivity to raw materials and destination markets. For example, Exxon Mobil, an American oil and gas firm, will this year complete the construction of its largest integrated chemical and refining site in Singapore. Similarly, Lanxess, a German chemicals company, recently moved its butyl rubber global headquarters from Switzerland to Singapore. This race for access to raw materials and energy partly explains the increasing number of partnerships involving state-owned PeC firms. One of the largest projects is Royal Dutch Shell’s US$4.3bn integrated10 “Chemicals in China: The refinery and petrochemicals joint venture with CNOOC in Guangdong that was set up in April 2006. 10next decade”, KPMG, Sep 1st2006. Another is BASF’s Nanjing-based US$2.9bn joint venture with Sinopec that began operations in 2005. BASF also has a joint venture with Petronas in Kuantan, Malaysia. These two facilities are BASF’s largest production sites in Asia. Similarly, in November 2011, nationally-owned Kuwait Petroleum Corporation and China’s Sinopec11 “Sinopec, KPC start started building an RMB59bn (US$9.3bn) joint refining and petrochemical complex in Guangdong.11 Thebuilding $9.3 bln petrochemproject”, Reuters, Nov 17th project includes a refinery and a one-million tonne a year ethylene cracking unit and is expected to come2011. on stream in 2015. This typifies the kind of partnership Mr Mukundan speaks of: Kuwait needs a steady outlet for its oil and Sinopec needs a reliable supply of oil in order to manufacture petrochemicals to meet China’s growing demand.14 © The Economist Intelligence Unit Limited 2012
  16. 16. Asia Competition Barometer: Petrochemicals and chemicals Case Study: BASF phase of its “highly-integrated, highly energy-efficient” production complex in Nanjing which serves multiple industries such as agriculture, construction, electronics, pharmaceutical, automotive and BASF: Deepening its presence in Asia chemical manufacturing. Furthermore, BASF’s construction chemicals At BASF, the world’s largest chemical producer by turnover, Asia division is moving to strengthen its focus on “third generation revenues reached €12.5bn (US$16.3bn) in 2010, or about 21% of the technology” for the concrete admixture market in China. company’s global sales. Albert Heuser, the firm’s president of market “At the same time we are looking for new ways to take advantage and business development in Asia Pacific, says that in the first three of the development of the region from an operational standpoint,” quarters of 2011, BASF’s sales increased across all segments of its Mr Heuser says. BASF has set up an engineering and technical business in Asia Pacific. China alone accounted for sales of €5.8bn procurement office in Shanghai, which represents an important part (US$7.5bn) in 2010, making it the third largest market for BASF of the firm’s global engineering and procurement network. The office globally, after Germany and the US. provides project management and execution services for projects in “We target regional growth of around 8% per annum in Asia Pacific Asia, and engineering and technical procurement services for non- between 2010 and 2020,” Mr Heuser says. By 2020, BASF expects Asia Asian projects. to account for 25% of its global sales. Asia is increasingly important There is a need to ensure cost structures are competitive, says not merely as a market, but also for production—BASF forecasts that Mr Heuser, and BASF is doing this through efficiency measures such emerging markets will contribute about 60% of total global chemical as fixed cost savings, capacity increases and better sourcing. “The production by 2020. intensity of competition has increased in the Asia Pacific region, with Mr Heuser says that BASF is striving to develop its portfolio towards new capacity coming on stream from multinational companies, state- “more market driven and innovative businesses”. For instance, over owned and private companies throughout the region,” says Mr Heuser. the past several years, the company has made acquisitions that build “Local competitors are improving their capabilities, but this varies its capacities in engineering plastics, electronic chemicals, catalysts, widely from product to product.” water-based coatings, pigments and plastic additives. The company In order to maintain its profitability over the next few years, Mr has simultaneously divested businesses in pharmaceuticals, fibres, Heuser wants BASF to move downstream towards customer industries printing systems, polyolefins, agro generics and vitamins premix. so that by 2020 the share of its sales of classical chemicals will be closer He adds that across Asia, the adoption of new technologies is to 30%, while customised products, functionalised materials and essential. For instance, the company recently completed the second solutions will reach around 70%.© The Economist Intelligence Unit Limited 2012 15
  17. 17. Asia Competition Barometer: Petrochemicals and chemicals Outlook T he PeC market in Asia has grown steadily over the past few years. Given the region’s bullish long-term growth outlook, this trend looks likely to continue. In particular, demand from the consumer goods, agriculture, automotive and construction sectors will drive the region’s PeC sector. Meanwhile, the increasing global and regional emphasis on sustainable development and alternative energy sources will create new potential markets for PeC firms. Moreover, Asia has also become an important region for PeC production. For the industry as a whole, after a sharp dip in profitability in 2008— due to a slowdown in demand amid the global economic downturn crisis, coupled with higher input costs—margins have risen to near their six-year peak. In particular, big companies have been able to exploit economies of scale and grow rapidly, both organically and through mergers and acquisitions. With ongoing consolidation in the industry, it seems likely that the bigger firms, with adequate resources to invest in R&D, will continue to grow their market share. Mr Heuser at BASF says competition in Asia will continue to increase as all regional players view the region—and especially China—as a key market, “meaning that management attention is high and resources are made available”. However, he believes that because PeC sector competitiveness is closely tied to the rate and quality of innovation, international companies enjoy the benefits of a global research and development network. According to him, such firms have a distinct advantage if they can tailor the benefits of such an international network to the needs of local customers. In recognition of this, BASF is investing heavily in R&D in Asia, including substantially increasing its R&D headcount. Perhaps the greatest imperative for PeC firms over the next few years is the need to secure access to low-cost raw materials and energy. As a result, the sector is seeing an increasing number of partnerships between MNCs with global networks and technological know-how, and local players, including state- owned firms, with access to resources—another trend that will favour larger companies. With energy and feedstock price arbitrage likely to determine profitability and competitiveness, companies of all nationalities will be forced to expand into new markets. According to Mr Mukundan, “All of us have to realign ourselves.” Global PeC firms that are able to adapt to these evolving industry trends will be best placed to boost top- and bottom-line growth.16 © The Economist Intelligence Unit Limited 2012
  18. 18. Asia Competition Barometer: Petrochemicals and chemicalsBarometer methodologyT o assess the intensity of competition and understand the changing market dynamics in key sectors, the Economist Intelligence Unit has developed the Asia Competition Barometer. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics ofcompetitiveness in Asia for select industries between 2004 and 2009. Assessing a universe of over 550 publicly-listed petrochemical and chemical companies across eightcountries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—theBarometer examines changing profitability and the competition landscape for the T&L sector.How do we define the petrochemicals and chemicals manufacturing sector? The petrochemicals and chemicals manufacturing (PeC) sector includes the following sub-segments:basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms,pesticides and other agrochemical products, paints, varnishes and similar coatings, printing ink andmastics, soap and detergents, cleaning and polishing preparations, perfumes and toilet preparations,explosives, other chemical products and man-made fibres.MethodologyThe Barometer has two dimensions: profitability and market concentration. Profitability IndexTo assess the aggregate profitability of the PeC manufacturing sector in Asia, the Economist IntelligenceUnit developed a composite index of five ratios that each represent a different aspect of a company’sprofitability: • EBITDA margin (%): A measure of a company’s operating profitability. It is equal to earningsbefore interest, tax, depreciation and amortisation (EBITDA) divided by total revenue. Because EBITDAexcludes depreciation and amortisation, EBITDA margin provides a clearer view of a company’s coreprofitability. An increase in competition may put pressure on an industry’s profit margins.© The Economist Intelligence Unit Limited 2012 17
  19. 19. Asia Competition Barometer: Petrochemicals and chemicals • Gross margin (%): When used as a market measure of competition, gross margin measures the profitability considering only the costs of goods sold. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. An increase in competition tends to reduce firms’ ability to increase prices and thereby increase its gross margin. • Return on capital employed (%): A measure of the efficiency and profitability of a company’s capital investments. Return on capital employed also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. An increase in competition may require firms to employ additional capital to maintain profitability. • Return on equity (%): A measure of the rate of return on the shareholders’ equity. It measures a firm’s efficiency at generating profits from every unit of shareholders’ equity. Return on equity shows how well a company uses shareholder funds to generate earnings growth. A rise in competition tends to put pressure on returns on shareholder funds. • Return on assets (%): A measure of how profitable a company’s assets are in generating revenue, or how profitable a company is relative to its assets. Return on assets determines a company’s ability to utilise its assets efficiently and effectively. Higher competition tends to put pressure on firms’ ability to maintain return on assets. We aggregated company-level data for over 550 publicly-quoted PeC companies and examined their profitability ratios. To enable observation of trends over time, a composite Profitability Index was developed (where year 2005 = 100). EBITDA and gross margin are given a higher weighting in the index as they speak directly to bottom line profitability, while the return on capital employed, return on equity and return on assets ratios speak to how a company make use of its various resources to drive return (i.e efficiency/ productivity). Profitability indicator Weight in Profitability Index EBITDA margin (%) 35% Gross margin (%) 35% Return on capital employed (%) 10% Return on equity (%) 10% Return on assets (%) 10% Market concentration To assess market concentration, the Economist Intelligence Unit calculated the Herfindahl-Hirschmann Index (HHI) for the PeC sector in Asia from 2004 to 2009. A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as the sum of the squares of the market shares of the 50 largest firmsfrom the universe of over 550 listed companies12 Or summed for all the firms assessed.12 HHI values can range from 0 to 1.0, moving from an extremely fragmented market (0) to ain the case that there arefewer than 50. monopoly (1). HHI values have been multiplied by 100 to achieve a scale consistent with profitability indicators. A rising HHI index generally indicates falling market competition, while a fall in the HHI suggests that competition is increasing.18 © The Economist Intelligence Unit Limited 2012
  20. 20. Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any person on thisreport or any of the information, opinions or conclusionsset out herein.

×