Commodity chemicals cyclicality

Let us look at another example. Commodity chemicals, too, suffer from potential overreactions - not, in this case, because of wrong estimations of growth opportunities, but because capital markets are fooled to some extent by the industry s marked cyclicality. 

Perfect capital markets should see through the cycle and the reaction of valuations to purely cyclical fluctuations in the industry return on capital should be insignificant. To examine this, we again compared the actual valuation level to a fundamental predicted valuation level for commodity chemical companies. To pinpoint the effects of cyclicality, however, we used a slightly different approach. As we wanted to evaluate capital market expectations, we compared the actual valuation level with a fundamental valuation level based on perfect foresight , i.e., assuming that the capital market knew the actual development of the key value drivers for the next 8 years and evaluated this information in line with its implied fundamental value creation.4 Furthermore, we used a capital structure-adjusted market-to-book ratio instead of an earnings-based metric for the valuation level. 

The acute cyclicality of the commodity petrochemical industry s profitability makes it a difficult business for investors to evaluate the lack of steady earnings means that investors tend to undervalue commodity chemical companies at the trough and overvalue them at the peak (see also Chapter 2). It is also a difficult business for chemical companies to manage, in that timing of investments is both of critical importance to profitability and extremely difficult to get right. 

However, if chemicals are irredeemably cyclical, does that make commodity chemicals an unattractive business In our view, the key is to look beyond individual cycles, at the long-term profitability of the sector. This reveals a perhaps surprising judgment, in view of conventional wisdom about the sector s unattractiveness commodity chemicals have earned returns above their weighted average cost of capital (WACC) across a number of cycles, making it very different and a much better performer than most other commodity sectors. 

The commodity chemical industry is highly cyclical, but earned better returns over the last 20 years than other commodity industries. Underlying the chemical industry s performance have been profit fly-ups during product shortages, which assure producers of the returns they need to reinvest. 

As an abundant, nontoxic, non-flammable, easily available, and renewable carbon resource, C02 is very attractive as an environmentally friendly feedstock for making commodity chemicals, fuels, and materials [1-7]. In this respect, PEGs-functionalized catalysts have been developed for efficient transformation of C02 into value-added chemicals or fuels such as cyclic carbonates, dimethyl carbonate (DMC), oxazolidinones, organic carbamates and urea derivatives. 

As pointed out above, the business process is likely to be profoundly influenced by a fully implemented policy of PI. A chronic problem in the manufacture of commodity chemicals is the cyclical nature of the industry. This is induced by over enthusiastic simultaneous investment in large-scale upratings which are then followed by an oversupplied market. The alternative scenario which is rendered feasible and economic by PI, is to uprate the plant in smaller steps in order to follow the market more closely. This should avoid the boom and bust with today s technology. 

One of the recurrent features of the commodity chemical industry is its instability or cyclic nature. This is, in large part, due to the tendency for many firms to make investment in new plant simultaneously, to follow a rising market, only to see prices fall when overcapacity results. The conventional view of a world class plant is that it must be big in order to capitalise on the 0.6 power rule, which states that capital costs only increase at (production rate)° as discussed with an example in Chapter 2. Intensified plants, however, with their lower capital costs, should allow smaller-scale plants to compete economically with their standard counterparts. Thus, in following a rising market, the capital investment can be made in smaller increments and be much less risky. This should facilitate a more orderly market development without recurrent bouts of feast and famine . 

Commodities are large-volume, low-price, homogeneous, and standardized chemicals produced in dedicated plants and used for a large variety of applications. Prices are cyclic and fully transparent. Petrochemicals, basic chemicals, heavy organic and inorganic chemicals (large-volume) monomers, commodity fibers, and plastics are all part of commodities. Typical examples of single products are ethylene, propylene, caprolactame, methanol, BTX (benzene, toluene, xylenes), phthalic anhydride, poly (vinyl chloride) soda, and sulfuric acid. 

The overall financial context of the chemical industry gives investors plenty of other issues upon which to focus. The chemical industry is a capital intensive, cyclical business with mature products typically sold into commodity markets. It often does not earn its cost of capital (Lev, 2001a). This has led to a number of sales of mature assets in the industry to financial buyers (Firn, 2004). Overall, cost cutting reigns as the principle financial strategy while the capacity for innovation and growth is modest. 

In the early 1990s, some specialty chemical segments were price sensitive and cyclical, with international producers focusing more on customer service than on research and development. Some producers had not raised prices in years. By the mid-1990s some specialty chemical segments displayed the characteristics of mature commodity sectors. Slowly prices were raised, and some... 

Due to their high molecular masses, macromolecular substances (polymers) show particular properties not observed for any other class of materials. In many cases, the chemical nature, the size, and the structure of these giant molecules result in excellent mechanical and technical properties. They can display very long linear chains, but also cyclic, branched, crosslinked, hyperbranched, and dendritic architectures as well. The thermoplastic behaviour or the possibility of crosslinking of polymeric molecules allow for convenient processing into manifold commodity products as plastics, synthetic rubber, films, fibres, and paints (Fig. 1.1). 

Biodegradable polymers made from cyclic esters have received increasing attention as resorbable biomaterials as well as commodity thermoplastics. Although the CAGR amounts to 20-30%, it is still a niche market accounting for around 1% of the synthetic plastics. Among the monomers, lactic acid, either produced by fermentation or chemical processes, gives access to polylactides (Scheme 21.16)... 

Around 110 megatons (Mt) of CO2 are annually used in commercial synthesis processes, to produce urea, salicylic acid, cyclic carbonates, and polycarbonates. The largest use is for urea production, which reached around 90 Mt/yr in 1997. In addition to these applications, there are a number of promising reactions currently under study in various laboratories, reactions that differ in the extent to which CO2 is reduced during the chemical transformation. They include the synthesis of commodities and intermediates (acetic acid, methanol, carbonates, cyclic carbonates, and lactones), polymers (polyurethanes, polypyrones) and a variety of functionalized carboxylic acids (propenic acid, 3-hexen-l,6-dioic acid). A more detailed description can be found in the cited review. ... 

---