Value creation of chemical companies and its driving factors

If most of the performance of the capital market in the chemical industry is controlled by a few major companies, what does this mean for CEOs of chemical companies that cannot change the performance of the industry? The short answer is that they should focus on effective ways to create value for shareholders.

First, when we look at which companies have created value, we find that many of them are active in M & A activities. This shows that the regional integration measures that enable enterprises to obtain economies of scale will continue to promote the positive and reliable profit growth of the industry. On a broader level, this is also consistent with our research: companies that are more active in allocating capital tend to perform better than their less active peers. Of course, it goes without saying that deals must be well planned and chemical companies must avoid paying too much for acquisitions and ambitious M & A activities. For a long time, both actions have destroyed promising enterprises.

Second, companies should continue to focus relentlessly on functional excellence, and, related to that, invest in numbers and advanced analysis to increase productivity. In this field, CEOs of chemical companies want to establish competitive advantage more than ever before. We have observed that most leaders of chemical companies have made digitization one of their top priorities.

Third, our research on capital market performance in the chemical industry also confirms McKinsey's earlier findings in a wide range of industries, that simply entering the right market is crucial to the sales and profit growth required to create value and excellent capital market performance. For example, a large part of the industry's TRS growth in bulk chemicals comes from companies that are active in the high growth Asian market. At the same time, in the field of specialty chemicals, companies active in agriculture and paint and coatings are major contributors to TRS growth. In agriculture, this reflects the growth of basic food related needs worldwide, and these companies are major providers of crop protection products and seed technology. In terms of coatings, this partly reflects that the growing middle class in emerging markets is turning to buy brand products.

Finally, we have carried out the latest research on the persistent liquidity of the chemical industry, from which CEOs can be encouraged: good strategy can bring returns, whether it is manifested in upward mobility or at least the ability to maintain positions. In our latest analysis, we compared the company's economic profit from 2012 to 2016 with that from 2002 to 2006; our previous analysis compared the situation between 2010 to 2014 and 2000 to 2004. What's changed? Our new analysis shows that the proportion of people who keep the top five ranking is higher - 56% and 50%. We also found that fewer companies went from the lowest fifth to the highest fifth - 9% more than 21%. On the other hand, flow increases immediately between adjacent segments compared to our final report: 13% of the middle 60% of the companies make it quintuple into the top, in the previous analysis, this proportion is 10% and 48% of the middle 60%, compared with 33% in our previous analysis.