European chemicals producers will target growth in mature markets through small- to mid-sized deals that make them more resilient to demand cyclicality and input price volatility, Fitch Ratings said Monday.
According to Fitch this type of acquisition will see producers focus on high value-added products rather than commodity chemicals, where European players are becoming less competitive.
According to Fitch it is not so much that European producers are abandoning nonspecialty chemicals, rather that they are shifting their strategy toward markets with robust growth potential.
As part of this shift, Fitch-rated Western European players are all engaged in mid-to-large scale expansion plans designed to increase their exposure to emerging economies, often in partnership with domestic producers, the ratings agency said.
BASF's planned acquisition of Becker Underwood reinforces this view. BASF will end 2012 having both sold and bought assets tied to agricultural end markets.
In April, the company completed the sale of its Antwerp-based nitrogen fertilizer business to Russian group Eurochem for Eur830 million ($1.07 billion). It is now spending $1 billion on the acquisition of US crop protection producer Becker Underwood.
According to Fitch, the key factors differentiating the two businesses are value-added and technological content.
The divested asset produced commodity chemicals with a strong dependence on petrochemicals feedstock. Aside from the high initial capital investment, barriers to entry are low. Competition favors producers with large-scale assets and access to low-cost raw materials.
Conversely, the barriers to entry remain high in crop protection chemicals. These typically have strong innovation content and R&D programs for new compounds that span 10 years or more. Competitiveness is based on value/performance rather than price/volume, the ratings agency said.
The deals would see BASF reduce its earnings cyclicality, the ratings agency said, adding that the company still maintains exposure to agricultural end markets and the strong demand associated with demographic growth, reducing arable land and increasing pressure on food supplies.
BASF's current investment projects include world-scale facilities in China, Malaysia and Brazil and the group targets sales of Eur20 billion in Asia-Pacific by 2020, 70% of which will be produced locally.
Other European producers also expanding in China are DSM and Akzo Nobel, which are expanding existing capacity there and seeking to double their revenues in the country by 2015 (from 2010 levels).
Lanxess, meanwhile, plans to spend Eur435 million over the next three years on new synthetic rubbers facilities in Singapore and China.
