The chemical landscape changes: Dow and DuPont merge and unscramble

imagesimgresFor those of us who have followed the development of the U.S. chemical industry for a number of decades, the newly announced “blockbuster” Dow-DuPont deal is the latest fascinating development. Here is a synopsis of industry history (Time periods are approximate):

1900 – 1945     International cartels (IGFarben, ICI, DuPont, Montecatini, Solvay,others) dominate the industry. Few firms in each country, little competition, much cooperation, pricing in Europe controlled by cartels.

1945- 1979     The new petrochemical industry gives birth to many new commodity chemicals producers.  Tremendous advances in commodity and other organic chemicals technology. Profits good as growth allows all to thrive much of the time. A new specialty chemical industry develops with a large number of companies offering partly differentiated products.

1980- Mid-nineties   Recession, too many producers of commodity and some specialty chemicals, substantial consolidation in petrochemicals, partly due to advent of Middle East producers and to backward integration advantages of oil companies. Reengineering  causes companies to exit/sell smaller, non-core businesses. Some consolidation. Commodity producers eye specialties as more likely to be profitable, but find it difficult to “ride two horses”.

Mid-nineties to present. Very little new technology. Large chemical companies exit commodities and buy/ create large specialty businesses. Private equity buys many other specialty companies. Toward end of this period, both commodity and specialty chemicals producers experience lower growth/lower growth prospects. Even with limited number of competitors in each product area, profitability is shrinking, while companies with several specialties find it difficult to compete with leaders who have only one business area (i.e. ag chemicals)

And so  Dupont and Dow decide to merge and then split, to join their respective ag chemicals and non-polymer specialty businesses (the latter probably to be named DuPont) into two separate companies to achieve scale. Dow keeps the rest, consisting mostly of advanced, somewhat differentiated polymers, both commodity and specialty plus Dow-Aramco joint venture in petrochemicals.(This is necessarily an abbreviated description of the deal).  True commodities (e.g. polyethylene, PVC, polystyrene, ethylene glycol, ammonia, methanol) will henceforth be dominated by oil companies, fertilizer companies, and the Middle East.

Unquestionably, this merger/demerger is the result of the rising pressure of large investors who had already succeeded in causing the resignation of Ellen Kullman, ex-CEO of DuPont. Andrew Liveris, also under some pressure, had long recognized the current trend and was able to quickly make the deal with the new CEO of DuPont.

Large chemical companies traditionally owned a number of businesses, usually some commodities(usually mature businesses) and some specialties or intermediate(growth) businesses. Conventional wisdom was that the mature businesses throws off cash which is used to pay dividends and supplies capital for R&D needed by the growth businesses. The Dow/DuPont decision indicates that this strategy no longer works well and marks an end to that concept.

Will this be “it” for chemical industry restructuring? Don’t bet on it!

 

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2 Responses to The chemical landscape changes: Dow and DuPont merge and unscramble

  1. Joe Pilaro says:

    “True commodities (e.g. polyethylene, PVC, polystyrene, ethylene glycol, ammonia, methanol) will henceforth be dominated by oil companies, fertilizer companies, and the Middle East.”

    Above is the current, short-term direction, leaving the question that a return to the pre-1945 conditions of near monopoly in the global Chemical Industry will be allowed by government regulators. I doubt it. Narrowly focused chemical companies like LyondellBasell, Potash Corp. and Methanex Corp. will continue to flourish independently in the new economic environment of the twenty-first century that is driven by the demographic shift from the developed North American and European nations to the continents south and east. Chemical industry investment in the Middle East is and will continue to be the foothold from which the growth will spread to meet the demand from that demographic shift. Long live the global chemical industry.

  2. Peter Spitz says:

    Good comment! The shale revolution in the U.S. makes this “exception” to a new rule possible. But as you know, my main point is that a bifurcated portfolio, as Dow and DuPont have pursued, may no longer make sense.

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