The Chemical Sector

The products of the chemical industry are ubiquitous in modern life. Plastics, fibers, drugs—these are a few of the products we encounter everyday in our workplaces and homes that are direct products of the chemical industry. Many more of the products we use daily—paper, fabrics, cosmetics, and electronics—are produced using the products of the chemical industry. The chemical sector is a key part of the national economy while its products represent only 2 percent of the U.S. gross domestic product, they underpin most other manufactured goods and enable our way of life. 

To identify the vulnerabilities posed to the nation to terrorist attack on or other catastrophic loss in the nations chemical infrastructure, it is necessary first to somehow succinctly characterize this large and varied sector. This is done below in two steps (1) a scheme for categorizing the vast number of chemicals produced by the sector and defining these categories and (2) a general model describing the sectors supply chain. 

Virtually all chemical manufacturing, storage, and use in the United States fits into one of the following categories  

A description of each of these categories, including a generalized discussion of the manufacture, transport, and use of the chemicals within that category, is given below  

This category entails chemicals produced from hydrocarbon feedstocks, such as crude oil products and natural gas. It includes such chemicals as hydrocarbons and industrial chemicals (e.g., alcohols, acrylates, acetates), aromatics (e.g., benzene, toluene, xylenes), and olefins (e.g., ethylene, propylene, butadiene, methanol). 

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REACH has now been in force for 5 years. REACH is setting the legal frame for the chemical sector. But REACH also gave a task, which is to work off for more than 15 years a safety check for all existing chemicals. 

The most important shift is from the historical automotive sector to the new hydrogen-vehicle technology sectors. This conglomerate consists mainly of fabricated metals, the electrical and the machinery plastic sector and the chemical sector. 

The higher prices of cars, which is balanced by subsidies, has two impacts in ASTRA first, car manufacturers increase their revenues and output, compared with BAU, and second, a few other sectors that manufacture significant shares of the fuel cell also benefit. HyWays estimates that about one third of a car s price is related to the drive train. For hydrogen-fuel-cell cars, out of this one third about 30% is assumed to be provided by the chemical sector and 40% by the electronics sector in ASTRA. The remaining 30% is still manufactured by the vehicle sector. Hence, the according shares of demand for H2 fuel-cell vehicles are shifted from the vehicles sector, which before produced 100% of the drive train, to the chemicals and electronics sectors, respectively. This affects the sectoral final demand and the input-output table calculations in ASTRA. 

The Chemical Transportation Emergency Center (CHEMTREC ) created the Chemical Sector Information Sharing and Analysis Center (CHEM-ISAC). The CHEM-ISAC serves three purposes ... 

European Commission, Integrated Pollution Prevention and Control, Reference Document on Best Available Techniques in Common Waste Water and Waste Gas Treatment/Management Systems in the Chemical Sector (February 2003)... 

Figure 6 History of the Standard Poor stock index in the chemical sector and other selected sectors of the economy, 1997-2002. (From www. bloomberg.com.)...

As mentioned above, one interesting aspect of the chemical sector is that the industry as a whole is highly fragmented. The top ten companies in chemicals (excluding pharmaceuticals) account for only 18 percent of the total market, well below comparable values in other industries, such as automobiles, where the top ten firms account for 85 percent of sales, or pharmaceuticals, where the top firms account for more than half of all sales (Fig. 1.6). While the overall consolidation level is low, several product segments have already consolidated. The top ten manufacturers of acrylic acid, for instance, account for 85 percent of their market. The top ten manufacturers of crop protection products account for 87 percent of their market, and the top ten in paints and coatings for 42 percent. 

In-depth research into the results of the VCI surveys tells us that the call for tighter controls is an unconscious precautionary reflex resulting from the generally high level of skepticism towards the chemical sector. There are ways to soften the blow, however for example, the reaction is lessened if the consequences of increased regulation are made clear. In addition, the underlying awareness of the sector s value and the progress that has been made on responsible behavior can be awakened. 

In the mid 1990s, buyout firms began to conduct leveraged transactions in the chemical industry. A slew of multi-billion dollar LBOs suggest the trend has intensified since the start of the new millennium. This chapter explores the relevance of private equity investors for the chemical sector and describes the value generation levers they apply it examines what traditional chemical corporations can learn from their financial competitors and concludes with a description of buyout firms challenges in the chemical industry and an outlook. 

At first glance, the chemical sector appears unattractive for investors. It tends to have relatively low growth, high capital intensity, rather high volatility of raw material cost, currency risk in a highly internationalized market, and numerous environmental and regulatory issues. In addition, revenues and returns are nota-... 

Buyout firms, in turn, are keen to conduct transactions as they face pressure to employ the money raised from investors in recent years. According to estimates, the private equity industry as a whole raised USD 900 billion between 1998 and 2003 (3i/PwC 2000 to 2004). However, the industry has invested only about USD 800 billion, leading to a capital overhang of around USD 100 billion by 2003. Part of this immense capital wave is flooding into the chemical sector. European markets in particular are profiting from the capital inflow as many large and experienced US buyout firms have started only recently to build up resources in Europe in order to prepare for high profile LBOs (Lemer, J. et al. Dixit, A. Jayaraman, N.). 

The increased buyout activity in the chemical sector is a consequence of all the effects described above. However, this does not explain how top-tier buyout firms actually generate value through these transactions. Studies have revealed that, on... 

Due to these companies inherently private nature, there is still a lack of empirical data linking outperformance by leading buyout firms to specific value generation levers. However, it is still possible to describe the levers applied by buyout firms operating in the chemical sector. This is particularly useful for chemical company executives as it helps to demystify some of the myths that surround the operations of their new financial competitors. 

The second real danger lies in exiting the acquired assets. Buyout firms are forced to sell portfolio companies at the end of the predefined limited lifetime of their funds. It is no secret that this has become more problematic in recent years and that the average retention time of assets has increased. In fact, relatively few have managed to successfully divest in the past few years and exiting portfolio companies is one of the top issues for private equity players operating in the chemical sector. 

Private equity investors have been successful in the chemical sector and have helped strengthen chemical businesses that have been carved out of larger conglomerates. 

The Chinese chemical market is attracting huge foreign direct investments. Between 1993 and 2003, investment projects amounted to around EUR 20 billion of contractual FDI, with Bayer, BASF, Shell, and BP the four biggest investors. Over the last ten years, five percent of foreign direct investment was into the chemicals sector. Multinational corporations (MNCs) tend to enter via joint ventures partially driven by the need for feedstock access, but wholly foreign-owned enterprises will become more common following China s membership of the WTO. 

Besides these large companies, which offer a range of additives as extensive as possible, if only to recoup research expenses and the high cost of tests required to obtain approval of the packages, there are a number of chemical companies that have also established a foothold in the market of lube oil specialties. Their reason for doing so was that they had acquired know-how in the chemical sector leading to the products marketed. 

For 2010-2011, the chemicals industry looks brighter, particularly if U.S. and American economies can shake off their doldrums and begin significant growth. Meanwhile, Asian economies, along with Brazil, were enjoying robust economic growth as of mid 2010, which boosted the chemicals sector. On... 

Concern for the environment is nothing new, yet decisions affecting the chemical sector are making headlines. Microsoft curtailed its use of polyvinyl chloride (PVC), also known as vinyl, for computer packaging products. Other companies cutting their use of PVC include Hewlett Packard, Wal-Mart Stores and Kaiser Permanente. Another potentially... 

European Commission (1998) Report on the operation of community legislation in the chemicals sector. COM (1998) 587/3. 

A study that examines how REACH could be devised or implemented to promote innovation in the chemical sector is lacking. Decisionmaking under REACH will need to address this lack of company-and sector-specific business impact assessment data. In particular, regulators will need to account for the distribution of business management risk between companies, across sectors and through supply chains. Otherwise the financial and management hurdles... 

As a result of the number of companies operating in the chemical sector, one would expect that it is relatively easy to co-ordinate, harmonise and regulate chemicals across Sweden, but is difficult to do so in the UK. This may be true, but each national regulatory approach also differs due to historical and cultural reasons. Ultimately each approach seeks to safeguard human health and the environment while sustaining the international competitiveness of its national chemical and manufacturing industries. There are several advantages and drawbacks to each approach that depend only partly on the size and structure of the industry. 

Assessment of the Business Impacts of New Regulations in the Chemicals Sector Final Report prepared for the European Commission Directorate-General Enterprise, RPA and Statistics Sweden, London, UK, 2002. 

In the chemical sector, the most prominent example of demand for chemical weapons knowledge is Syria, where General Anatoly Kuntsevich, head of Russia s chemical weapons program, built a chemical weapons infrastructure. ... 

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