Reaction Magazine Eleventh Edition July 2013 Kpmg

7/17/2019 Reaction Magazine Eleventh Edition July 2013 Kpmg

http://slidepdf.com/reader/full/reaction-magazine-eleventh-edition-july-2013-kpmg 1/48

Strategicrealignmentin the globalchemical industry

p12TheBusinessCase forSustainability

p2

REACTIONChemical Magazine / Eleventh Editi on

Strategicrealignment in theglobal chemical industry

kpmg.com

http://www.kpmg.com/

http://www.kpmg.com/



IntroductionWelcome to the latest edition of Reaction Magazine and without wishing totempt fate, it would seem the overall outlook within the industry is a lot morepositive than it was when we released our last edition in March. Certainly,the US economic recovery appears to be taking hold and despite continued

weakness in the Eurozone, the debt and currency crises of the last few yearsseem to be a thing of the past, although structural issues still need to beworked out.

In this edition, we focus on strategic challenges facing the global chemicalindustry and recommend five key actions executives need to focus on to maketheir companies successful in tomorrow’s world. We also take an in-depth lookat sustainability and how the green agenda is continuing to shape and drive thechemical industry and the products it produces.

As ever, we continue to be active in the industry, with members of ourChemicals and Performance Technologies leadership team present recently at

the CBA Lunch in London and the SCI Palladium Award Dinner in New York.We will be back with our next edition in September, which will focus on China,to coincide with our next visit to the Asia Pacific region and our annual ChemicalExecutive Dinner in Shanghai – I look forward to seeing many of you there forwhat is always a great event. If there are any other topics you would like us tocover in future editions of Reaction, please don’t hesitate to contact us.

Mike Shannon

Global Chair

Chemicals and Performance

Technologies

© 2013 KPMG International Cooperative (“KPMG International”). KPMG Internationa l provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.


http://slidepdf.com/reader/full/reaction-magazine-eleventh-edition-july-2013-kpmg 3/48© 2013 KPMG International Cooperative (“KPMG International”). KPMG Internationa l provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.





02 12TheBusinessCase forSustainability

Strategicrealignmentin the globalchemical industry

Reducing operational impactsthrough sustainability

06 Strategic issues in the globalchemical industry

20

Transforming the chemicalssector through innovation

08 Global mega trends continueto provide opportunity

22

Lost direction in emerging markets30

R&D investment key to

sustainability success

10 Reinvigoration of the US: Supply

moves West as demand moves East

24

Five strategic actions for success33

Conclusion11 Challenges for Europe28

Conclusion40




The Business Case for Sustainability

by

Yvo de BoerSpecial Global Advisor,

KPMG Climate Change & Sustainability

Going green: a sustainable advantage forchemical companies




Today’s chemical companies are taking major steps to create

a more sustainable chemical sector. Previously, pursuing

a sustainable agenda was viewed as more of a cost than a

benefit, with companies narrowly focused on reducing their

environmental impacts and achieving regulatory compliance

through incremental changes to feedstocks, operations, and end

products. Now, sustainability has become a top business initiative

for many forward-looking chemical companies. These companies

realize that sustainability is not only a way to reduce environmental

impacts and carbon footprint, but it also provides opportunities

to significantly lower costs, meet both customer and consumer

requirements, and develop new products and services that address

the needs of a growing world population. In short, leading chemicalcompanies are driving innovation and transforming the industry by

embracing sustainability.




S

ustainability in the chemicalindustry used to be primarily

focused on reducingenvironmental impacts of operationsand products. While this is undoubtedlyimportant, times have changed andso has the wider business context.For example, the global chemicalindustry’s shift to the East, along withthe sector’s key end-customers such astextiles, automotive and constructioncompanies. Overall, the chemicalindustry in Asia is bigger than WesternEurope and North America put together.

This move to the East is one of severalemerging global megaforces affectingchemical companies. Megaforces canpresent business risks, but perhaps moreimportantly, they can fuel innovationfor forward-looking companies. Globalmegaforces are prompting industryleaders to develop comprehensivesustainability strategies that incorporatethe upstream and downstream social,environmental, and economic impacts ofindustry operations.

According to KPMG’s own analysis1,there are a number of globalmegaforces having an impact onthe chemical sector. While many ofthese are driving demand for chemicalproducts, they also provide operationalrisks and challenges as set out below:

• Water scarcity and rising water

costs. Regions expected to see themost demand growth for chemicals –South Asia, East Asia, and theMiddle East – are also likely to face

severe physical and economic waterscarcity. Companies competing withlocal communities for scarce waterresources are at risk of losing theirlicense to operate.

1 Expect the Unexpected, KPMG International, 2012

http://www.kpmg.com/global/en/issuesandinsights/articlespublications/pages/building-business-value.aspx2 Ibid.3 Ibid.

• Energy and fuel volatility. Fossilfuels are used both as feedstock and

to supply energy for the chemicalproduction process. The sectorremains a high energy user, with oiland gas the dominant feedstocks,along with coal which is being usedmore widely, particularly in China.

• Climate change legislation. Thesector remains one of the most energyintensive industries and is vulnerableto emissions regulations, which coulderode profits. Even modest taxes ongreenhouse gas (GHG) emissions

could reduce profitability.

• Population growth and

urbanization. Communities areincreasingly sensitive to the potentialenvironmental impact of chemicalplants.

• Reputation. Chemical companiesare traditionally considered to have a

negative impact on the environment.Despite attempts to improve publicreputation of the sector, perceptionsremain below average compared withother sectors.

Considering cost alone, companiescannot afford to ignore these globalmegaforces. According to KPMGresearch, the external environmentalcosts of 11 key industry sectors rosefrom US$566 to US$846 billion duringan eight-year period (2002 to 2010).2 In

the case of the chemical sector, datasuggests that the environmental impactin 2010 amounted to US$43 billion andwould account for 43 percent of sectorearnings.3 This is a significant shareof chemical company profits which ispotentially at stake if the sector does notadapt to environmental and social forces.

European chemical industry public image

% o

f p o s i t i v e r e p l i e s

25

35

1996 1998 2000 2002 2004 2006 2008 2010

45

55

65

75

85

49 - CHEMICAL 76 - Telecom & Electronics 73 - Food 66 - Pharmaceutical 64 - Automobile

62 - Electricity 59 - Average of all industries 42 - Petrol & Oil 38 - Nuclear Energy

Source: European Chemical Industry Council (CEFIC). (2010). Cefic Pan European Survey on the image of the chemical industry 2010.


4

Reaction | Eleventh Edition



Business must takea leadership role in thedevelopment of solutions

that will help to create amore sustainable future.By leveraging its ability toenhance processes, createefficiencies, managerisk, and drive innovation,business will contribute

to society and long-termeconomic growth.

– Michael Andrew

Chairman of KPMG International



5



4 Ibid.5 Ibid.6 Ibid.

Sustainability strategies in today’schemical industry have at theirheart the objective of minimizing

negative social and environmentalimpacts associated with chemicalmanufacturing, while continuing tomeet customer and consumer needs,by developing innovative and eco-friendly products and services.

Meeting this objective requires carefulmanagement of environmental impactsincluding air and GHG emissions, energy

intensity, and water use. Companieshave discovered that sustainabilityinitiatives can facilitate significant costsavings by reducing overheads forenergy, water and feedstocks.

The same initiatives can enhancea company’s reputation as a goodenvironmental steward. Althoughreputational risk will continue to bea challenge to chemical companiesworldwide, affecting operations,strategic planning, resource recruitment

and other areas, companies that adaptwill be better positioned for changingmarkets and fluctuations in resourceavailability around the world.

The chemical industry is currentlyresponsible for approximately 5 percentof global man-made GHG emissions.4 Assuming sustained growth undera “business as usual” scenario, thechemical sector’s emissions areforecast to more than double by 2030.5 However, many chemical companieshave already grasped emissionsreduction as an opportunity to gaingreater efficiencies and reduce costs,potentially diverting the sector’semission from this growth forecast. In

the US and Europe, the chemical sectorhas significantly reduced its energy andgreenhouse gas intensity. In Europe,energy consumption remained aboutlevel from 1990 to 2008, and GHGemissions fell by 42 percent even whileproduction rose by 69 percent.6

In Europe, improved manufacturingsustainability is supported by dedicatedpolicies to stimulate the developmentof “clusters” of interdependent firms,academic and support institutions,

and customers, all linked to each otherin a value-adding production chain.Cluster members leverage industry

experience and knowledge to increasemanufacturing sustainability up anddown the supply chain. Chemicalindustry clusters can play a fundamentalrole in improving competitiveness ofall members while lowering energyintensity, streamlining access to rawmaterials, containing the risks ofenvironmental pollution, and reducinghealth hazards.

Reducingoperationalimpacts throughsustainability

Many chemicalcompanies have alreadygrasped emissions reductionas an opportunity to gaingreater efficiencies andreduce costs, potentiallydiverting the sector’s

emission from this growthforecast.


6




Chemical industry GHG intensity reduction: 1990-2009

I n d e x

( 1 9 9 0

= 1

0 0 )

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 200930

40

50

60

70

80

90

100

110

EU chemical industry GHG* intensity US chemical industry GHG* intensity

Source: European Chemical Industry Council (CEFIC). (2011). Facts and Figures 2011: The European chemical industry in a worldwide perspective.

Average growth rate 1990-2009-2.6%-5.8%

EU greenhouse gas IntensityUS greenhouse gas Intensity

* Including pharmaceuticals

European chemical production decoupled from energy use

I n d e x

( 1 9 9 0

= 1

0 0 )

1990 1994 1998 2002 2006 200940

60

80

90

100

110

120

130

140

150

160

170

Greenhouse gas emission Energy consumption Chemicals production

Source: European Chemical Industry Council (CEFIC). (2011). Facts and Figures 2011: The European chemical industry in a worldwide perspective.



7



Transforming the chemicalssector throughinnovation

7 Ibid8 http://www.greenbiz.com/blog/2013/01/11/why-small-companies-lead-second-chemical-revolution?page=0%2C0&utm_

source=E-News%20from%20GreenBiz&utm_campaign=1a55de08e7-GreenBuzz-2013-01-11&utm_medium=email

The sustainability strategies ofleading chemical companies havebroadened as they aim to meet

customer and consumer needs – andthe needs of a rapidly expanding globalpopulation – through innovative andeco-friendly products and services.This is an exciting area, where leadingchemical companies are investing inresearch and development (R&D) andfinding new markets based on socialand environmental responsibility.

Progressive companies are graspingthe opportunity to develop products andtechnologies that offer positive socialand environmental benefits beyond theirown operations in other, downstreamindustries.

Examples include insulation materials,advanced lighting, plastics, andagricultural products that can reducecarbon emissions, reduce water use,improve nutrition and increase safety.It is no surprise that the International

Council of Chemical Associations hascalculated that for every unit of GHGemitted through chemical industryproduction, the resulting productsenable savings of 2-3 units.7

Chemical companies such as BASFare examining the impact of theirproducts downstream for customers.For example, in 2012, the use of BASF’sclimate protection products enabled its

customers to avoid 320 million tons ofequivalent carbon dioxide (CO2e). Themajority of savings came from BASF’sproducts in the construction sector suchas cement additives and insulation, alongwith transport sector products, suchas lightweight plastics for cars, and inagriculture through nitrification inhibitors.

Companies are also discovering thata sustainability strategy can uncovernew business opportunities and createa quantifiable competitive advantage.

For example, BASF generated US$9billion from sales of climate protectionproducts in 2012, the equivalent of9 percent of total sales. As early as2006, DuPont set a target for 2015 toincrease their annual revenue by at leastUS$2 billion from products that createenergy efficiency and/or significantlyreduce greenhouse gas emissions.The company already reached US$1.9billion in 2011. Sales of sustainableproducts across the sector seem likelyto continue on a growth trajectory.

Further examples of chemical industryproducts with sustainability benefits onthe market today include:

• Housing and construction materials

such as insulation that reduce GHGemissions

• Plant biotechnology that improves

agricultural yields

• Biofuels and fuel cell technologies

for low carbon transport

• Bio-based chemicals that replace

the use of petrochemicals in plasticsand other products

• Chemical coatings that improve the

resilience of products

• Longer-lasting, safer batteries

• Safety glass

The chemical sector can also play a

significant role in developing solutionsfor a cradle-to-cradle, zero-wasteeconomy. For instance, chemicalcompanies can support the productionof tires that can be recycled into newtires as well as other products suchas shipping pallets, asphalt roads andwaterproofing.8

For every unit ofGHG emitted, the resultingproducts enablesavings of 2-3 units.


8


http://www.greenbiz.com/blog/2013/01/11/why-small-companies-lead-second-chemical-revolution?page=0%2C0&utm_source=E-News%20from%20GreenBiz&utm_campaign=1a55de08e7-GreenBuzz-2013-01-11&utm_medium=email





9




R&D investmentkey tosustainabilitysuccess

Many chemical companies areusing a sustainability agendato drive innovation and R&D.

Sustainability not only provides theimpetus to reduce carbon emissionsand minimize water and energy use,but also to develop products that willmeet the needs of a growing worldpopulation.

Companies with a strong commitmentto R&D continue to increase theirrevenues and market share by providing

high-performance, innovative andsustainable products to support marketsin a growing range of industries.Sustainability strategies of many leadingcompanies are underpinned by specificR&D and innovation goals.

For example, Solvey aims to have100 percent of their R&D projects alignedto sustainable development by 2020,while reducing both GHG emissions andwater usage by 10 percent.

Dow Chemical’s innovation goal is to

increase the percentage of sales to10 percent for products that are highlyadvantaged by sustainable chemistry,while achieving at least three R&Dbreakthroughs that will significantly helpsolve world challenges. Likewise, PPGIndustries aims to achieve 30 percent ofsales from sustainable products by 2020.

By focusing on specific sectors andproduct areas, companies that committo significant R&D investment insustainability initiatives are increasing

their technological capabilitieswhile addressing global social andenvironmental megaforces such as

energy supply, human health, foodsecurity, housing, mobility, and accessto freshwater. For example in 2012,DuPont announced plans to investUS$10 billion in the food innovationsector by the end of 2020 and introduce4,000 new products centred onintroducing more food, enhancingnutrition, improving food and agriculturesustainability, boosting food availabilityand shelf life, and reducing waste.



10



ConclusionChemical companies are recognizingthat what is good for people andthe planet can also be good for thebottom line and shareholder value. Ina recent KPMG survey, 42 percent ofrespondents from chemical companies(and 60 percent of respondents fromthe large companies) said that theirorganizations derive financial value fromtheir sustainability initiatives.9

With sufficient foresight and planning,chemical companies can turn potentialrisks into new opportunities whiledriving the sustainability of the industry.

To achieve this, business leadersneed to fully understand the risks andanalyze opportunities for efficiency,substitution, adaptation and adjustmentin their operations. In effect, they needto acknowledge and address the globalmegaforces impacting the chemicalindustry, and make sustainabilitycentral to their corporate strategy. Thisincludes ambitious plans, targets and

actions relative to improving energy andresource efficiency, allocating resourcesfor research and development relatedto sustainable products and services,

using safe, renewable and bio-basedmaterials, increasing supply chainsustainability, and developing initiativesthat will address global needs, therebyidentifying new markets for innovativeand sustainable products, services andtechnologies.

Forward-thinking companies know thatsustainability presents opportunity forthe chemical industry – and innovation is

the key to success.

9 Research conducted for the KPMG International Survey of Corporate Responsibility Reporting 2011


11




Strategicrealignmentin theglobalchemicalindustryGlobal opportunities forcompanies that act today




by

Paul Harnick and

Andrew Monro

Paul Harnick is the ChiefOperating Officer of KPMG’sGlobal Chemicals andPerformance Technologiespractice. He specializes inemerging market strategydevelopment and complex,cross-border mergers and

acquisitions in the chemicalindustry.

Andrew Monro is a Partner withKPMG LLP in the UK and is theUK Chemicals and PerformanceTechnologies segment leader.He specializes in advising largeglobal clients on all aspects ofbusiness model transformation

and optimization, includingstrategy development and riskmitigation.




The global chemical industry isundergoing dynamic change, with arange of external factors presenting

industry executives with vastly divergentchallenges in different regions of theworld. As such, running a global chemicalcompany has never presented so manyopportunities and challenges.

Fundamentally, the industry continues tobe driven by two main factors:

• Global GDP dependence, which

necessitates vastly different behaviorsin emerging markets which continue to

expand (albeit at volatile rates); Europe,where embedded structural issuespoint to long-term stagnation; andthe US where a sustained economicrecovery seems to be taking hold; and

• Global issues including population

growth and middle class expansion;food and water shortage; energy andclimate change, all of which drivedemand for chemical products underthe mantra of making life better andour planet healthier – continuing to

drive the march downstream and thesearch for higher value, science-basedchemical products.

Overlay the shale gas dynamics in the USwhich are moving the supply base of theindustry west; while the demand sideof the industry continues to move eastand south, and executives have anothersignificant issue to grapple with as theyset their global business strategies.

It is somewhat surprising then, that astate of inertia currently exists withinthe global chemical industry. Rewind to2009-10 and the dynamism displayedby the industry in the face of the worsteconomic conditions in generations wasastounding. Costs were cut, cash wastightly managed, balance sheets werede-leveraged and under-performing assetswere closed or sold as global chemicalbusinesses were re-aligned for long-term success such that the industry thatemerged from the downturn was leanerand more efficient than it had ever been.

Perhaps it should not be surprising thatthe industry paused for breath as growthreturned in 2010-11. Perhaps the slow-down in emerging markets, never-ending

fiscal crises in Europe and uncertaintiesrelated to the US fiscal cliff in 2012knocked confidence which had only justbegun to recover. Perhaps also, a state of

comfort has crept in – particularly at thecommodity end of the industry in the US,where cheap gas feedstock is deliveringonce in a lifetime returns of profitabilityand cash. In 2012, and the first halfof 2013, the world’s leading chemicalcompanies have returned billions ofdollars of cash to shareholders throughspecial dividends and share buy-backs.While these actions may offer a short-term boost to EPS, they do nothing todevelop the long-term strategic directionof the company.

We believe it is time for the globalchemical industry to stop deferring theimportant decisions and re-focus on thenext wave of strategic re-alignment. Theworld is changing rapidly and there arehuge rewards available for the chemicalcompanies who can develop theirbusinesses in advance of the comingtrends. We offer five strategic platformsfor development:

1. Capture growth from emergingmarkets – increase the pace of

developing emerging marketfootprints to capture long-termgrowth and the emerging customerbase. There is a need to be creative


14




and look beyond China. A portfolioapproach to capture the benefits andoffset the risks inherent in differentmarkets comes from balancinggeographic expansion.

2. Optimize the portfolio – take a moredisciplined approach to identifyingbusiness units and segments whichwill not be competitive in the long-term; or which do not fit with the widerbusiness strategy. In particular, removethe history and sentiment attached tolegacy businesses, which often resultsin chemical companies holding ontoareas which are no longer optimal interms of maximizing shareholder valueor no longer fit the strategy.

3. Build financial strength – many of thegood things the industry was doing in2008 onwards have stopped.

Supply chains have become bloated,buffers have been built in inventoryand discipline around receivablescollection has weakened. Movingthird and fourth quartile working

capital performance back to medianperformance (among the world’s50 largest chemical companies) could

unlock $24.9 billion of cash – cashthat would be better utilized fundingthe activities above to drive growth.

4. Reduce business model complexity –build leaner, more efficient businessmodels which are more readily ableto adapt to change. The chemicalindustry has become proficient atbuilding structure and process andheavily integrating these structuresresulting in reduced flexibility –adding layers of costs and functionswhich confuse the picture ofunderlying business performance,making it difficult for managementto make optimal decisions andsubsequently, make it difficult todeliver change.

5. Focus innovation to drive priceand margin – among the widermanufacturing industry, the chemicalindustry is a clear leader when itcomes to customer centric innovationand new product development. Forestablished market companies, wedon’t pertain to offer anything newhere – just a reminder to continue tofocus on this as a core competencyfor long-term success. For emerging

market companies, the pace ofdevelopment of specialty chemicalbusiness units has been slow, suchthat many are now no closer to theheralded move downstream thanthey were five years ago, whileopportunities continue to pass themby. Basic chemistry is much malignedbut as part of a fundamental GDPbuilding block it offers a platform tofoster development.

Each of these is based around anexisting chemical industry corecompetency, but there is a clear needfor renewed focus and increased paceof change. It is not enough to do one ortwo of these well. A successful strategyin today’s world requires all aspects tobe performed equally well, at the sametime, often at different paces in differentregions of the world.

The time for change is now. In our view,those who wait and react will fall behindthose who embrace the changingdynamics.


15




-1 0 1 2 3 4 5 6 7 8%

2013

2014-2018

2019-2025

* Europe includes all 27 current members of the European Union, as well as Iceland, Norway, and Switzerland.

** Other advanced includes Canada, Israel, Korea, Australia, Taiwan, Hong Kong, Singapore, and New Zealand.

*** Southeast Europe includes Albania, Bosnia & H erzegovina, Croatia, Macedonia, Serbia & Montenegro, and Turkey.

Source: The Conference Board Global Economic Outlook 2013, January 2013 update

United States

Europe*

of which; Euro Area

Japan

GDP growth

Other Advanced**

ALL ADVANCED ECONOMIES

China

India

Other Developing Asia

Latin America

Middle East

Africa

Russia, Central Asia and Southeast Europe***

ALL EMERGING AND DEVELOPING ECONOMIES

WORLD TOTAL

In 2009, the chemical

industry hit the brakes

hard. The globaldownturn caused major

de-stocking, which in

turn forced chemical

companies to rationalize

their portfolios and

restructure operations

to cut costs, eliminate

overcapacity, reducecomplexity and improve

cash management. To

its credit, the chemical

industry in general has

greatly benefited from

these actions. In 2013,

however, many chemical

companies appear

reluctant to continue

down this road of

transformation, even as

global industry dynamics

make the world a

complex and challenging

place. We believe that

now is the time to act –

not just react. Only thosecompanies that take

bold, strategic actions

today to rationalize,

optimize, streamline,

innovate and expand will

be positioned to become

the global industry

leaders of tomorrow.

A portfolio approach to capture the benefits andoffset the risks inherent in different markets comes frombalancing geographic expansion.

Global outlook for growth of gross domestic product, 2013-2025


16




1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017-2

0

2

4

6

8

10

12

14

Source: IMF, World Economic Database, 2012

WorldAdvanced economies Emerging and developing economies

Advanced C&E Europe Developing Asia Latin America MENA

0

20

40

60

80

100

120

2007 2012

Source: IMF, World Economic Database, 2012

Contributions to world GDP growth

Gross government debt levels as percentage of GDP

Only those companies that take

bold, strategic

actions today to rationalize,optimize, streamline,innovate and expand will bepositioned to become theglobal industry leaders of

tomorrow.


17




The macroeconomic landscape

If a number of chemical companies

are risk averse, the reasons are clearto see. Economic recovery has beenunexpectedly slow and remainsuncertain. Many companies felt that 2012would be a turnaround year, but globalGDP growth hovered around 3 percent.10 In addition, emerging market growthstagnated in 2012 and 2013 is unlikelyto see a return to the high GDP growthrates experienced in the recent past.

According to the International MonetaryFund (IMF), global GNP will grow3.8 percent in 2013.11US growth willaverage almost 3 percent and almost 6percent in emerging markets. Activityin the euro area is expected to declineby 0.2 percent. The Conference Boardforecasts an extended slow-down inemerging economies, with growthdecreasing from 5.5 percent in 2012 to5.0 percent in 201312. This includes adecrease in China from 7.8 to 7.5 percentand in India from 5.5 to 4.7 percent.13

Although recovery appears to beestablished in the US, advancedeconomies are still suffering frombalance sheet recessions, and thatprocess will take several more yearsto repair. Emerging economies are

favored by longer-term drivers of growth

such as demographics and proximityto strong markets, but they are notimmune to problems faced by advancedeconomies or their own economiccycles. This volatility adds complexity –three years ago, not many people wouldhave foreseen the GDP growth ratein Brazil dropping from 6% to 2%; northe Middle East losing its feedstockadvantage to the US.

In short, risks to global recovery remainfirmly in place and clearly large partsof the chemical industry remain highlydependent on GDP. However, as wediscuss in the next section, globalchemical industry trends provideopportunities to remove an elementof the global GDP link and establishsuccessful business units (BUs) with afocus on growth and expansion. Indeed,many companies are already followingthis path. For example, BASF hasidentified 7 key segments (agriculture,construction, energy, nutrition,

transportation, consumer goods andelectronics) where chemical demandwill outgrow the expansion in underlyingcustomer industries14.

10

Global Economic Outlook, Outlook 2013 , Update January 2013, The Conference Board11 Gradual Upturn in Global Growth During 2013, IMF, January 201312 Op. cit. Global Economic Outlook, Outlook 2013, Update January 2013 13 Ibid.14 BASF strategy, November 2011


18




19




Strategic

issues in theglobal chemicalindustry




−10.5%

North America

$611bn

+1.0%

Latin America

$195bn

+ 6.9%

CAGR

World

$3,567bn

$bn

−10.2%

European Union

$701bn

+18.7%

China

$956bn

− 4.3%

Japan

$228bn

+ 4.8%

Rest of Asia/Pacific

$516bn

2011 marketshares

Americas EU/RoW Asia

25% 23% 52%

Market trendShare of world

sales 2001-2011Chemical sales (2011)X%

World chemicals sales by region

Source: CEFIC

Population growthand urbanization

Globalization

Water and foodscarcity

Climate change andenergy efficiency

The chemical industry as enabler.........

....making life better and

our planet healthier

Source: KPMG International, 2013

Demand continues to move to emerging markets

Global mega trends provide the focus for industry innovation


21




Global mega trends continue to provideopportunity

Chemistry is widely recognized asa vital component of life. Water,food, plastic, fertilizer, sanitizers,

the list is long and well regarded.However, when the words change to“the chemical industry”, the mindsetchanges yet the industry has a brighterfuture than it has ever had.

Indeed, the global industry is huge andgrowing. Global chemical output wasvalued at US$171 billion in 1970; by 2011,it had grown to US$3.6 trillion.15 The

Organisation for Economic Cooperationand Development (OECD) predicts thatglobal chemical sales will grow about3 percent per year to 2050, with growthrates for the BRIC countries more thandouble those of the OECD countries.16 Forecasts developed by the AmericanChemistry Council (ACC) also predictsignificant growth in chemical productionin developing countries in the periodto 2021, and more modest growth indeveloped countries.17 Consistent withprevious trends, China is expected to

have the highest annual growth ratesin chemical production, exceeding10 percent per year until 2015.18

This will only serve to drive thecontinued shift of the global chemicalindustry’s demand base to the emergingmarkets as producers seek to followtheir customer base and capitalizeon population growth and a risingmiddle class. Indeed, the key marketsfor textiles have already moved tothe East, with markets for plastics,agrochemicals, pharmaceuticals,construction materials and automotivecomponents moving to China, India andother parts of Asia, in particular.

At the same time, those trends of agrowing population and an industrializingworld provide significant challenges,particularly with respect to food andwater scarcity, climate change andthe need for energy efficiency. Thechemical industry has already madehuge technological advances in theseareas. Advances in seed technology andagrochemicals for crop protection havehelped drive huge increases in crop yieldper hectare of arable land. With respect

to climate change, for every kilogram(kg) of CO

2 emitted by the chemical

industry, the products it develops savein the region of 3 kg of CO

2 further down

the value chain. In the automotive sectorspecifically, the average car now containsin the region of 100kg of lightweightthermoplastics, which replace between200 – 300 kg of traditional materials –cutting fuel consumption and minimizingenvironmental impact19.

These trends are not going away.Over the coming years, the need todeliver vital products and solutions willcontinue to provide new opportunitiesand new market segments for the

chemical companies who can developthe products that make life better andour planet healthier. Indeed, today’schemical industry value chain is beingre-shaped and re-defined by thesetrends as many companies re-inventthemselves as science and technologyor advanced materials manufacturers –focusing on high value specialtyproducts and relentless downstreamexpansion. Even the emerging marketchemical companies who initiallyestablished themselves as commodity

chemical majors now have a thirst for IPand technology as they seek to capturethe additional growth and margin thatexists downstream.

15 Facts and Figures Report , CEFIC, 2012

16 OECD Environmental Outlook for the Chemicals Industry , OECD, 201317 Mid-Year 2011 Situation & Outlook , American Chemistry Council18 Op. cit. OECD Environmental Outlook for the Chemicals Industry 19 Transport: saving energy and improving safety , APPE, 2013


22






Reinvigoration of the US: Supplymoves West asdemand moves East

U S $ p e r m i l l i o

n B T U s

02 03 04 05 06 07 08 09 10 11 12

$14.00

$12.00

$10.00

$8.00

$6.00

$4.00

$2.00

$0.00

$16.00

$18.00

Source: EIA, Petrobras, IMF, World Bank, various national statistical agencies

United States Belgium Germany Japan Brazil China India

Impact of shale on US natural gas prices

The single most importantdevelopment for the US industryhas been the development and

commercialization of shale gas, enabledby the widespread use of hydraulicfracturing (fracking) and horizontaldrilling. These extraction methodscombined with the sheer abundance ofproven shale reserves (200 years based

on current US demand outlook) havetheoretically made the US industry thesecond most feedstock-advantagedregion after the Middle East. However,as Middle Eastern countries continueto use more gas for domestic energyand fuel for water de-salination plants,gas allocations to the petrochemicalindustry have become extremely

limited, such that we would arguethe US is now the most advantagedlocation for petrochemical productionworldwide and until the developmentof European and Asian shale (not likelybefore 2017), the US will continue toenjoy an enormous advantage.

The single mostimportant development for the US industry hasbeen the development and

commercialization ofshale gas, enabled by thewidespread use of hydraulicfracturing (fracking) andhorizontal drilling.


24




P r o d u c t i o n

C o s t s ( U S $ / p o u n d )

Global Supply (Cumulative in billions of pounds)

0

Middle EastChina

China

United

States

Western Europe

Other

Northeast

Asia

Other Northeast Asia

United

States

Middle East

85

$1.40

$1.20

$1.00

$0.80

$0.60

$0.40

$0.20

$0.00

Source: American Chemistry Council, 2012

141 210 247 311

Western Europe

2005 2011

Shifting the global ethylene cost curve

% c

h a n g e o n y

e a r e a r l i e r

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-40

-30

-20

-10

0

20

10

30

40

GDP Motor vehicles and parts Constructions Chemicals

Source: US Federal Reserve Board, American Chemistry Council

Mature US economy unable to absorb planned capacity

The impact of US shale gas on thechemical industry is evident from theshift in the global ethylene cost curve(discussed in KPMG’s paper entitled The

miracle of shale and the future of US

chemicals ). Recent announcements fromDow, Shell, Sasol, ChevronPhillips andothers suggest that we will likely see over10 million tons of new ethylene capacitycome on stream by 2017. The question is

where that product is going to go.

Undoubtedly, the US economy appearsto be in a sustained phase of recovery,

with renewed strength in key industriessuch as automotive and construction.Cheap shale gas is also providing aboost to the wider US manufacturingbase – providing competitively pricedenergy such that “Made in America”is becoming a cost competitive optiononce again, leading some multinationalsto re-base their production activities inthe US. Despite that, the US remains a

mature economy which will not be ableto absorb all of the planned chemicalcapacity. While companies have made

bold strategic announcements aboutthe initial capacity expansions, we donot believe that in all cases there hasbeen clear development of the businesscase with respect to where the ultimatemarkets for those products are goingto be; nor how companies are going toget products to those markets whileretaining the underlying production costadvantage. Significant investment in

supply chains is required along with afocus on establishing a broader growthmarket presence.

Recent announcementsfrom Dow, Shell, Sasol,ChevronPhillips and otherssuggest that we will likely seeover 10 million tons of newethylene capacity come onstream by 2017.


25




TODAY 2017


Changing petrochemical trade flows because of shale gas

As these dynamics play out over thenext few years, the shale phenomenonis likely to fundamentally alterthe established pattern of globalpetrochemical trade flows. We seethree potential scenarios, which are notnecessarily mutually exclusive:

1. A return to boom and bust cyclicalityin the US – the US commoditychemical industry is currently wellrationalized – perhaps for the firsttime ever – with much of the historic

cyclicality removed and commoditychemical businesses enjoying stablelong-term returns. If US chemicalcompanies are unwilling or unable todevelop customers for their productsoutside of the US, we are likely tosee the return of cyclicality, resultingin large margin swings through thecycle, the closure of old plants atthe bottom of the cycle and all theother ills historically attributed to thecommodity industry in the US.

2. Price and margin erosion in Asia –the Asian market is currentlypredominantly served by local

product supplemented by vastimports from the Middle East. AsUS product starts to flow to Asianmarkets, we may see increased pricecompetition – which may becomeincreasingly fierce if some of theimplications above have alreadystarted to affect the US market –making producers increasinglydesperate to sell their productwhatever the cost.

3. Doomsday for European

petrochemical production – largeparts of the European commoditychemical industry are characterizedby over-capacity and older, lessefficient plants. Should US producersexport directly to Europe, orshould Middle Eastern producersrespond to increased competitionin Asia by switching their exportfocus to Europe, many Europeancommodity chemical producers willfind themselves at a severe cost

advantage, making it difficult for themto compete.

The Asian market is currently predominantlyserved by local productsupplemented by vastimports from the MiddleEast.


26




27




Challengesfor Europe

115

110

105

100

95

90

85

80

20

18

16

14

12

10

8

6

4

2

0

-2

-4

-6

-8

-10

-12

-14-16

-18

-20

-22

-24

-26

2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Cefic Chemdata international, *Chemicals (excluding pharmaceuticals, New Nace Rev2. C20)

January 2013, % change (y-o-y)

-1.6

EU Chemicals*: Production

Production index (2010=100), Left Hand Side (LHS)

Production % Change (y-o-y), Right Hand Side (RHS)

Overall, Western Europe continues

to be afflicted by long-termstructural issues, most of which

have been widely documented such thatthere is no need to repeat them here.For the commodity chemical industry onthe continent, there is also the specterof low cost competition resulting fromthe development of the shale basedchemical industry in the US as discussedabove. Indeed, many global chemicalcompanies are focusing activities intheir European business units on cost

reduction, downsizing and rationalization.

However, all is not lost for the European

chemical industry. Despite not showingany growth, the European Union (EU)remains a large market with 739 millionconsumers and a huge base ofdownstream manufacturing industrysuch that efficient chemical producerswith differentiated products are still ableto make reasonable returns. There isalso something of an East/West divide.Too often, chemical companies are quickto relegate Europe as a whole to thebottom of their list of destinations for

investment capital – a strategy which

neglects the growth to be found in

Eastern Europe and a number of the CIScountries, particularly in segments suchas automotive where OEMs continue tomove their manufacturing base to lowcost Eastern European countries.

Europe also remains home to some ofthe most advanced IP and technologywithin the global chemical industry. Long-term success for European chemicalcompanies is dependent on investingin and retaining this technologicaladvantage, while leveraging it as an

asset to provide access to growth in


28




emerging markets. We believe more careneeds to be taken over the decision tolicense technology – particularly wherealternative arrangements may offer betterlong-term returns. Establishing jointventures (JVs) with emerging marketcompetitors may be time consumingand there are plenty of examples of JVsgone wrong, but in a chemical industry

where emerging market companies havethings that the Europeans do not have –an abundance of cash and ready accessto high growth markets – there seems tobe a clear opportunity for the Europeancompanies to better utilize the one thingthey have that the emerging companiesneed – technology – in order to level theplaying field.

Finally, there needs to be a rational

debate about the development ofshale gas in Europe and we call on thechemical industry to lead this. Whilecertain countries, including France,appear to have indefinitely ruled outfracking, the UK is making strides todevelop its shale resources. Largedeposits exist elsewhere – Germanyand Poland in particular – and while thegas pipeline infrastructure is nowherenear as developed as the UK or the US,there undoubtedly exists the potential

to unlock a cheap supply of energy and

feedstock. Experience in the US over

the last few years has already shownwhat this could mean for the chemicalindustry.

Leveraging strengths for mutual benefit

NorthAmerica

NorthAmerica

NorthAmerica

Japan

Japan

Japan

MiddleEast

MiddleEast

MiddleEast

NorthAmerica/Europe/

JapanMiddle

East

Brazil

Brazil

Brazil

Brazil

India

IndiaIndia

India

China

China

China

China

Europe

Europe

Europe T E C H N O L O G Y / K N O

W H

O W

SUCCESSFULLY CAPTURE GROWTH AND MARGIN

P R O X I M I T Y T O G R O W T H

M A R K E T S

F E E D S T O C K

C A S H / D E B T


Many global chemical companies are focusing activities in their European business units on cost reduction, downsizing and rationalization.



29



Lost directionin emergingmarkets

We discussed earlier the

importance of emergingcountries as the future

markets for chemical industry products,based mainly on their rapidly growingand rapidly developing populations andwhat that means for demand for anarray of products across the spectrumof nutrition, automotive, consumergoods and construction.

Despite this emerging market growthtrend being well established, we believethere has been a loss of focus, bothfrom established market chemicalcompanies and by emerging marketcompanies themselves.

Established market chemical companiesappear to have slowed the pace ofemerging market development. Infact, in a recent KPMG survey, 30%of industry executives surveyedsaid they did not currently have anemerging market strategy. For thosethat do, there is an over-dependenceon China. While we do not questionthat a China strategy should be closeto the top of any chemical executives’issues list – even with recent cooling,7.5% compound GDP growth is higherthan almost anywhere else on theplanet – there is an obvious danger ofrelying solely on one market for growth,particularly when unforeseen changesin government policy can have a large,direct impact on economic activity.

Failure to develop a wider emerging

market strategy also results incompanies missing many of thebenefits available elsewhere. We seea broad array of countries in the nextwave of chemical industry growthas their economies develop alonga similar growth path to that of theBRIC countries over the last twentyyears. Hotspots for chemical industrygrowth are likely to include EasternEurope (discussed above), Vietnam –which has overtaken China as the low

cost manufacturing base in Asia –Indonesia – with a potential market ofmore than 200 million consumers –Thailand, Malaysia and the Philippines.

While global chemical companies haveundoubtedly failed to capitalize on theadvantages offered by these markets,they cannot be entirely blamed for theslow pace of development. Barriersto business remain rife in a number ofcountries including poor infrastructure,the ability to enforce contracts, the

rule of law (particularly in respect ofanti-bribery practices), and the opacityof ownership structures all of whichmake it difficult for established marketcompanies to invest. There is a challengefor the respective governments to focuson establishing laws and regulations thatprovide a more attractive investmentlandscape to foster chemical industrygrowth as a base for wider industrial

development. Even in more established

emerging markets such as India andBrazil, recent regulatory change,particularly in the areas of tax andduties are hindering chemical industryinvestment and growth.

For emerging market chemicalcompanies themselves, there has alsobeen a pause in development. For muchof the last twenty years, their strategieswere an almost unmitigated success asmany of them became established asglobal power-houses in the commoditychemical sector – rising rapidly up theleague tables of the world’s largestchemical companies as measured byrevenue. However, despite a concertedeffort to develop downstreamchemical production in the MiddleEast (discussed in KPMG’s 2011 paperentitled The GCC in 2020: Downstream

expansion of the Middle East chemical

industry ) and despite specificdownstream policy pronouncementsin the Chinese government’s latest

five-year plan, there has been a paucityof development in this area such thatit is the established market chemicalproducers who continue to dominateproduction in higher value specialtychemical areas.

Undoubtedly, R&D efforts have beenboosted but this does not provide arealistic method for catching up withan industry that has been developing


30




for over 100 years in places like Europe,the US and Japan. M&A offers thequickest route to closing the gap butwith a few notable exceptions – thelargest being SABIC’s acquisition of GEPlastics, now 6 years past – there havebeen very few examples of emergingmarket chemical companies steppingout of their established boundaries andusing M&A to further their strategicobjectives of developing downstream.Cultural issues continue to inhibit dealactivity. Emerging market companies,particularly those with an element ofgovernment ownership, find it hardto obtain the necessary approvals toenable them to move quickly enoughin a deal environment, while none haveyet been able to balance the requisite

acquisition of technology with theassociated perceived disadvantageof holding assets in low-growth,established markets.

Aligning the critical elements along thesupply chain from feedstock throughtechnology and process know-how toend customer demand offers a winning

formula. No one business, country orregion is currently holding all of thecards and to the extent developedmarket producers continue to take acautious approach to emerging marketexpansion; while emerging marketcompanies fail to build a technologybase, billions of dollars of globalizationefficiencies are being lost.

Failure to develop awider emerging market strategy also results incompanies missing manyof the benefits available

elsewhere.

A portfolio approach to emerging market development

India

India

India

India

India

India

India

Brazil

Brazil

Brazil

Brazil

Brazil

Brazil

Brazil

Indonesia

Indonesia

Indonesia

Indonesia

Indonesia

Indonesia

Indonesia

Vietnam

Vietnam

Vietnam

Vietnam

Vietnam

Vietnam

Vietnam

Korea

Korea

Korea

Korea

Korea

Korea

Korea

Malaysia

Malaysia

Malaysia

Malaysia

Malaysia

Malaysia

Malaysia

Singapore

Singapore

Singapore

Singapore

Singapore

Singapore

Singapore

Saudi

Arabia

SaudiArabia

Saudi

Arabia

SaudiArabia

SaudiArabia

SaudiArabia

Saudi

Arabia

China

China

China

China

China

China

China

Market size& growth

Starting abusiness

Gettingcredit

Protectinginvestors

Tax burden

Tradingacrossborders

Enforcingcontracts

EASY

EASY

LOW/ZERO

STRONG

EASIER

EASIER

HIGH

LOW

HARDER

HARDER

WEAK

HIGH

DIFFICULT

DIFFICULT



31




32




The majority of large chemicalcompanies are global suchthat the opportunities andchallenges in the differentregions of the world, discussedabove, are not discrete –chemical company executivesneed to build all of these intotheir global business strategy,such that running a globalchemical company in today’sworld is extremely challenging.

However, we believe the pace ofchange within the industry hasslowed inexorably since 2009-10,when the focus on survival wasdriving activity. To successfullycapture the advantages andoffset the disadvantages inherentin today’s chemical world, webelieve companies need to basetheir immediate and long-termstrategies on the followinginitiatives:

Running a global chemical company is a challenge

Five strategicactions forsuccess

D e b t h o l d e r s i n

c o n t r o l

Decline

S h a r e h o l d e r s i n

c o n t r o l

Growth

Align to growth

markets

Optimize

portfolio

Operational

excellence

Innovation to

drive pricing

Financial

strength

Market tipping point

Grow

Sell

Close

Recover &Fix again

Grow

Failure

New customers

Cash generative

Attracting talent

Strong revenuegrowth/ Growing order book

Revenue static/declining,Order book flattens

Customer chum

Attracting & retaining talentbecomes harder

Need to align cost base

to declining revenues

Covenant breach

Increasing creditor’s pressure

Non-core disposals

AcquisitionsCapital raising

Transformationalgrowth strategy

Differentiation in the market

Refinance

Rapid cost reduction

Staff consultation

Rapid cash generation

Financing options

Accelerated disposals

Preparation for insclvency

Profitable

Acquisitive

Time

Emerging

markets

Western

Europe Japan US

Source: KPMG Analysis, 2012


33




Align to growth markets

A large number of large chemicalcompanies have been successfulat establishing an emerging marketfootprint over the last twenty years.DuPont, for example, now earnsapproximately 30% of its total global

revenue in fast growing markets,while BASF has over 25 subsidiariesin Greater China. For others, however,the pace of investment has beenmuch slower – a glance at the annualreports of many chemical companieswill reveal a clear under-exposure toemerging markets. Often, this resultsfrom a lack of clear strategy, or inherentphobia about emerging markets –where companies use concerns aboutlocal market issues such as potentialForeign Corrupt Practices Act (FCPA)violations or repatriation of cash as an

excuse to defer investment. In otherinstances, even where the will toinvest is strong, a lack of experiencehas de-railed companies from fulfillingtheir emerging market expansion goals.Too often, we see companies wasting

huge amounts of management timeand not progressing investment plans(be it M&A or greenfield investment) tocompletion because they have failed tounderstand the cultural dynamics andhave not accessed the decision makerson the other side of processes.

A similar lack of experience and inherentcaution is preventing emerging marketchemical companies from achievingtheir development goals. The emergingmarkets will be the chemical markets

of the next fifty years but we believe

too many companies are prevaricatingor playing it safe. Companies in bothestablished and emerging markets needto get better at building partnershipsthat align their respective strengthswhile off-setting their respective

weaknesses for a genuine win/win thatwill drive value and development forthe global chemical industry. That willallow established market companiesto align themselves to growth marketsin terms of application, industry andbusiness type, with particular emphasison establishing a broad geographicalfootprint in high-growth areas; whilealso allowing emerging market chemicalcompanies to access the technologyand know-how they require to movethemselves up the value chain.


34




Optimize portfolios

Companies need to take a hard, realisticlook at businesses and products,deciding whether to hold, fix or divestaccording to strategic goals. DowChemical is planning to divest non-core businesses totalling more than

US$1 billion over the next few years;Solvay and INEOS have recentlyannounced a JV for their European PVCassets, but more needs to be done.20

Too many companies have developeddeep, historical attachments to legacybusiness units (BUs) and continuallydefer decisions to divest despite thefact that they are clearly non-core.Holding onto such BUs provides a dragon management time, drives cost anderodes differentiation. Companies at

the other end of the spectrum havebeen too quick to bring non-performingassets to market and have beendisappointed by either a lack of buyerinterest or low valuation multiples.

We believe companies need to take a

more aggressive view of their entireportfolios and categorize BUs as either‘hold, fix or divest’. Where the decisionis to fix, there needs to be a clear focuson strategic value improvement –using clear financial and organisationalbaselines and an analytical numbersdriven approach to drive improvementacross the holistic breadth of the BU,including procurement, logistics, supplychain, manufacturing, R&D and financeand control. For BUs to be divested,

the key to maximizing value on disposalis taking time to prepare for sale. Fixunderlying performance issues beforebringing assets to market, undertakerobust financial and operational carveouts to disentangle businesses, and

have a clear view of both the valueproposition of the business and thelikely bidder community – recognizingthat the value proposition may bedifferent for different bidders.

20 Wall Street Journal, March 14, 2013


35




Reduce business model complexity

Most global chemical companies havegrown up over many years througha combination of organic growthand acquisition. Some companies inthe industry excel at integrating andsimplifying structures. Others havebecome increasingly complex as theyhave grown – from bloated centralstructures which confuse and complicate;

to multiple ERP systems which limitthe ability to extract quality BusinessIntelligence (BI); to complicated internalcross-selling and cross-charging, which

mask underlying business performance.With these and other issues, manyexecutives are finding it hard to makeinformed business decisions. While in the1990s and early 2000’s, heavy integrationwas the preferred model, it is no longerhelpful as it reduces flexibility – a criticalfailing in a world where the issues inthe external world are driving huge

complexity and rapid change.Solvay has recently announced a plan todecentralize and simplify the company’s

structure, while Dow has announcedplans to decentralize decision makingtaking it closer to the customer. Morecompanies need to deliver a clear focuson flexibility to simplify and removeunnecessary complexity from theiroperations. With sufficient flexibility,management can navigate macro-economic and business trends while

responding to changing customerdemands.

Complexity masks underlyingbusinessperformance

making it hard to makeinformed business decisions.


36




Flexibility is vital in today’s volatile markets. Many businesses have invested heavily to be more integrated,

more centralised, more heavily controlled.

Interdependencies and a lack of stand alone functionality create problems when a business is seeking to shift

its portfolio and get a clear view on individual operating performance.

Shared siteassets/

operationsShared

servicesShared

management

Inter-companyFeedstock

agreements

Integrated

accounting

Cross

charging

Integratedcustomer

agreements

Lack Of

Collaboration

Slow

Decisions

Lack Of

Focus

Focused

In CountryActivities

Hubs &

SSL Bring

Leverage

Management

Companies

Smaller

HQOperationBig HeadOffice

Head Office

In Country

Business

Head Office

In Country

Business

Collaboration

& Sharing


Innovate to drive competitive pricing and new product entry

Innovation is the platform that has driven sales. Many forward-thinking chemical do not have the requisite operatingthe chemical industry throughout its companies already have local-market expertise. If emerging market chemicalentire history. As humanity faces huge specific R&D centres in places like India companies are serious about developing

global issues including feeding a growing and China – although a few still cling to the their operations downstream, now is the

population and responding to climate problems of IP protection as an excuse time to take serious steps to bring that to

change, it is the products provided by not to take such a step. With so many fruition.

the chemical industry that are now; and other critical challenges facing chemicalThe technology they require exists withinwill continue to be the solutions. With company executives, it is important that aestablished market chemical companies.

these trends in place, we have seen many clear focus on R&D remains central to theNegotiating JVs which incorporate an

established market chemical companies fabric of the organization.element of technology transfer provides

over the last ten years drive an increasedFor many emerging market chemical an optimal route to doing this. Where

focus on science and technologycompanies, innovation still remains an they can’t find a willing partner, then

applications, moving ever further towardsaspiration. Overall, the IP base in the outright acquisition needs to be the

the specialty end of the value chain.emerging chemical markets remains low, model. Emerging market companies need

In 2012, DuPont had a record number with a reliance on established market to conquer their fear of holding assetsof new product introductions. At DSM, companies to either supply the product in western markets. In such situations,sales from new products and applications or to supply the technology via a license. careful integration holds the key tointroduced in the last five years accounted Often the technology licensed will not be success – integrating not just the assets

for 18 percent of total sales – a value of the most cutting-edge and even then, we and the processes, but the people so that€1,644 million. By 2015, DSM wants find many examples of emerging market the innovation culture is preserved and

innovative products and solutions companies not getting the technology protected allowing osmosis of leading

to account for 20 percent of its total to work effectively or efficiently as they practices into their existing businesses.

The pains of centralized structures


37




38




Optimize financial strength

of the cash cycle which was prevalent

just a few years ago. In total, analysissuggests that returning third andfourth quartile performers among theworld’s 50 largest chemical companiesto median cash performance wouldliberate $24.9 billion for growth andexpansion.

We see four pillars of working capitalefficiency being challenging strategicparameters and decisions that drivestructural working capital; changingoperating cash cycles and how policies,procedures, people and systems canimprove cash performance; releasingtrapped cash (e.g. from treasury,tax and other areas) to cleanse thebalance sheet; and embedding acultural foundation for sustainable cashflow improvement. The industry wasextremely successful at the first threeof these during the downturn. It is timeto re-focus and this time; ensure thatimprovements stick for the long-term.

In addition, we see too many companiesin a state of inertia, returning the cash theydo have to shareholders for lack of a clearstrategy. Using that cash to tackle theissues we describe above would provideshareholders with a far greater longterm return and would help companiesposition themselves strategically for thechallenges that lay ahead.

At 31 December 2012, the largest

30 chemical companies (by revenue)had combined cash reserves of$59.9 billion. Initially, balance sheetswere strengthened through 2009-10when companies were focused onliberating cash from operations to helpensure their survival. More recently,

cash generation has been the happy

consequence of the return to economicgrowth and the impact of improvedprofitability resulting from cheapfeedstock and energy in the US.

As a result, many chemical companieshave taken their eyes of the ball withrespect to tight control of all aspects

Achieving median cash performance

could unlock USD $24.9 billion for growthand expansion.


39




Conclusion

The global chemical industry has

been exceptionally successfulover a long period of time at

leveraging its core competencies todrive growth and development. Neverwas this more in evidence than duringthe dark days of 2009-10 when theindustry took huge strategic steps toensure its long term survival.

However, with the return of growth,

contradicted by recurring economicuncertainties and the shale boom in theUS which has driven cash generation,many global chemical companies findthemselves in a state of paralysis – driveneither by uncertainty or over-confidence.Meanwhile, the global chemical industrycontinues to experience dynamic changedriven by complex macro-economic andmacro-global issues.

We believe the time has come for

global chemical companies to drive arenewed focus on core competencies ofaligning to growth markets, optimizingportfolios, reducing business modelcomplexity, innovating to drive marginand pricing, and optimizing financialstrength. Successful delivery acrossthese five strategic platforms willoptimally position global chemicalcompanies for the future.


40




41




In this feature, we update you on some of the ways member firms have beeninvolved in the industry since the last edition of Reaction. It has been a busy fewmonths for our Global Chemicals & Performance Technologies team as we stayembedded in the heart of the industry.

Chemicals Market in Africa Workshop

KPMG in Germany recently co-sponsored the GermanChemical Association’s (VCI) full-day workshop on theChemicals Market in Africa. Nick Matthews, Head of M&A in

South Africa spoke on industry trends and the key to doingsuccessful M&A deals in Africa.

Vir Lakshman, Chemicals and Pharmaceuticals Sector Head inGermany moderated a lively discussion with an experiencedpanel from BASF, Bayer CropScience, Boehringer Ingelheimand Merck KGaA who shared their experiences of doingbusiness in Africa.

CBA Lunch

KPMG in the UK recently hosted a table at the CBA’s AnnualLuncheon in London this past April, the biggest chemicalindustry event in the UK was attended by over 1,000 industrymembers and their guests.

KPMG in the industry


42




43




kpmg.com/chemicals

Back issues are

available todownload from:

www.kpmg.com/

reaction

Missed an

issue of

Reaction?

Missed an

issue of

Reaction?

kpmg.com/socialmedia

Contacts

Read the latest edition of Reaction Magazine on your iPad anytime, anywhere.To learn more visit, kpmg.com/ipad

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual

or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is

accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information

Global Head of Chemicals and

Performance Technologies

Mike Shannon

Tel: +1 973 912 6312e-mail: [email protected]

In Asia

Norbert Meyring

KPMG China

Tel: +86 (21) 6288 2298e-mail: [email protected]

In Australia

Steve Tonner

KPMG Australia

Tel: +61 (3) 9288 5377e-mail: [email protected]

In CanadaRobert Jolicoeur

KPMG Canada


In France

Wilfrid Lauriano do Rego

KPMG France

Tel: +33 1 55 68 68 72e-mail: [email protected]

In Germany

Vir Lakshman

KPMG GermanyTel: +49 211 475 6666e-mail: [email protected]

In India

Vikram Hosangady

KPMG India

Tel: +91 98410 85580e-mail: [email protected]

In Italy and KSA

Johan Bode

KPMG KSA


In Japan

Arihiro Yanagisawa

KPMG Japan


In Netherlands

Lex Gardien

KPMG Netherlands

Tel: +31 (0)10 453 4163e-mail: [email protected]

In South America

Anselmo Macedo

KPMG Brazil


In SwitzerlandErik Willems

KPMG Switzerland


In UK

Andrew Monro

KPMG UK


Global Tax Lead

Frank Mattei


Global Marketing

Barbara Hooley


Global COO

Paul Harnick


Back issues are

available todownload from:

www.kpmg.com/

reaction

http://www.kpmg.com/chemicals

http://www.kpmg.com/reaction


http://www.kpmg.com/socialmedia

http://www.kpmg.com/ipad




http://www.kpmg.com/chemicals



http://www.kpmg.com/socialmedia

http://twitter.com/kpmg

http://linkedin.com/company/kpmg

Documents

Reaction Magazine Eleventh Edition July 2013 Kpmg