For 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!