Demand in the chemicals industry bottomed out in the second quarter of 2020, as shown by leading chemicals public companies’ earnings commentary, Capstone Headwaters reported last week. A resurgence depends on the containment of the coronavirus the investment banking firm stated in a release.
As economies continue to reopen, downstream demand is expected to recover, with gains in the specialty chemicals market in the United States driven by cosmetic additives, electronic chemicals, and flavors and fragrances.
Weakened downstream demand among automotive, construction, and general industrial markets were partially offset by steady demand for synthetic materials for nonwovens in personal protective equipment (PPE), disinfectants, pharmaceuticals, medical plastics, and food and beverage ingredients, according to Capstone Headwaters.
Production is near full capacity across the U.S., so chemicals manufacturers have seen the U.S. feedstock advantage return, but at less cost-efficient levels seen in previous years. This is a result of the unprecedented oil and gas price volatility that resulted from the COVID-19 pandemic and the end of production restraints from Organization of the Petroleum Exporting Countries (OPEC+) producers.
Global M&A activity in the industry fell 3.6 percent year-over-year (YOY) through July, with a notable slowdown in May. Buyers have predominantly sat on the sidelines as the pandemic swept across the globe, internally focusing on preserving liquidity and assessing operational impacts.
However, several notable deals, such as INEOS’ acquisition of BP’s petrochemical business (June, $5 billion) and SK Capital’s acquisitions of Techmer PM (July, undisclosed) and Baker Hughes’ Specialty Polymers (July, undisclosed), present evidence that buyers are returning to the table, albeit with tightened criteria and valuation expectations.
“We are seeing increased M&A [mergers and acquisitions] activity in chemicals and plastics, in particular, specialty sectors including food ingredients, compounded plastics, and advanced materials for coatings, adhesives, sealants, and elastomers (CASE) and other demanding industrial applications. Strategics and financial buyers are looking for new growth platforms to enhance or reposition their existing businesses and establish new footings in attractive sectors,” said Doug Usifer, managing director of Capstone Headwaters.
“Private equity sponsors are well positioned to assume a greater role in chemicals M&A in the near- and mid-term by tapping into over $1 trillion in committed capital and demonstrating their restructuring and operational efficiency chops,” said David Bench, managing director of Capstone Headwaters. “Unfolding events of the pandemic and resulting recession will create circumstances of lower valuations and corporate divestitures that will be ripe for sponsor-lead M&A activity.”