The Challenges Remain

The global chemical industry is fast approaching a turning point. After years of pared down profit margins and constant pressure to restructure and increase profitability, the industry is slowly but surely entering a period of renewed growth. Traditionally strong on exports, Europe's chemical industry is now having to contend with ever more powerful Asian competitors whose enormous production capacity is once again putting the squeeze on margins. Yet it is important not to overreact to this development; after all, the chemical industry has not been earning its capital costs these past ten years and as a capital-intensive industry is in any case subject to a hog cycle. Despite the massive expansion of the nineties, for example, it consistently fell short of expectations and according to some analysts paid too dearly for its acquisitions. Its focus since then has naturally been on cash and costs.

 These days, the chemical industry operates on a market that is transparent, global and mature, but is nevertheless having to battle with ever greater commoditization and the pressure on prices to which this gives rise - a situation further exacerbated by increasing competition from Asia. As much as the industry's global players appear unimpressed by this development, there can be no doubt that the chemical industry as a whole is poised for higher growth; this much is evident from the extent to which all the big chemical groups are now investing in Asia. We will be reporting on this development in the China section of this issue, starting on
page 11.
The market researchers at Deutsche Bank Research expect chemical sales in China to rise by ten percent a year over the next few years, topping 400 billion dollars by the year 2015. This compares to the annual rates of 3.5 and three percent being predicted for the USA and Germany respectively. If this forecast is correct, then China in 2015 will be the world's second largest chemicals producer after the USA. And the next ten years are likely to see India developing in much the same way as well. Whereas China is enjoying more vigorous growth rates and greater macro-economic stability, India has a higher standard of corporate governance and a much stronger commercial focus to its credit. In other words, India looks set to become a high-yield investment in future years, even if this will necessitate a number of reform initiatives on the part of the Indian government. So as you can see, the challenges remain.

-Thomas Röhl-