What can the industry's past tell us about its future?

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Vincent Valk:

Overall, I would say the report card for the industry is we are in a long down cycle. The industry is managing through it with a reasonable degree of profitability, but I do think there are some real question marks for the future. Hi, and welcome to the Chemical Week podcast. I'm Vincent Valk. Our guest today is Rob Westervelt, Head of Conference Content at S&P Global Commodity Insights and Editor Amoritus of Chemical Week. Hi Rob, welcome back to the show.

Rob Westervelt:

Hey, Vincent, great to be with you.

Vincent Valk:

So we published our annual billion dollar club ranking of the chemical industry's top companies on September 8th. And BASF, by the way, came out on top once again. And we thought it was a good idea or a good time to discuss some of these strategic shifts we've seen in the industry over the years and what these changes might mean. And we're going to do something a little bit different today. We're going to pass the ball back and forth between Rob and myself to get some perspectives on the past, present and the future. So Rob, to get started, I think you wanted to ask a bit about this.

Rob Westervelt:

Yeah, I've always viewed it probably actually, I've been with Chemical Week for 30 years. I was there at the launch in '97, '98, and it's always effectively served as a report card for the industry on its performance and how it's doing. And what does the report card say? I mean, what does this year's billion dollar club say about the state of the industry?

Vincent Valk:

Yeah, I know your question was about this year, but I think if you look at a couple of figures from the past two years, so that would be 2023 and 2024, it really tells a story. 2024 was not a great year for the industry overall, and median revenue for a billion dollar club companies fell by about 1%. But if you look back to 2023, median revenue was down 10% and operating income at the median actually rose by 4% in 24 compared with a 25% drop in 2023. So what this tells me is that the industry has been holding the line. We're in a prolonged down cycle. That's no secret. Multiple executives and multiple companies have commented on it.

But after a big deterioration in operating conditions in 2023, 2024 was fairly stable and profits have actually gone up a bit. I think that last figure is a reason to be optimistic that industry has gotten pretty good at managing through the cycle, but there's really no question that we are in a difficult environment for any number of reasons that we have discussed on the show before. Lackluster demand in most end markets, the capacity overhang in China, high cost in Europe, inflation, geopolitical uncertainty, I could go on. And these conditions really have been remarkably persistent. And of course, this year now you have the added complication of the Trump administration's tariffs and trade tensions. So it just is one thing after another.

Now, I will say that even though the industry you could say has managed through this cycle reasonably well. Profits, as I said did go up a little bit at the median in 2024. We have seen a lot of cost-cutting, a lot of plant closures, and that does raise the question of what are the longer-term impacts of the cost-cutting that we've seen? You cannot cut costs forever. And maybe we'll come back to that. And as I mentioned before with the tariffs, 2025 has been another tough year. You could argue that it's gotten a little bit worse again and also something that I hope will back to. But overall, I would say the report card for the industry is we are in a long down cycle. The industry is managing through it with a reasonable degree of profitability. But I do think there are some real question marks for the future.

Rob Westervelt:

Yeah. And through this prolonged downturn, which I guess we can go back to '21, '22, you had that immediate recovery after COVID and then by '22 things started to slow. I mean, what have we seen in terms of changes to the leaderboard over the last five years really since COVID?

Vincent Valk:

One of the strange things is since COVID, the leaderboard really hasn't changed much. Literally every company in the 2024 top 10 was in the 2023 top 10 with the exception of PetroChina, and that's only because we didn't have access to their data for 2023. If you go back to 2023, Rongsheng Petrochemical, another Chinese producer jumped up nine spots. But that was really it. And you've had some, just looking at the top 10, you've had some shifts around too, might be number 10 versus number 12 in a given year. Nutrien got into the number 10 spot in '22, which was a year of elevated prices for a lot of fertilizers and ag chem products because of Russia's invasion of Ukraine. But they've been just outside the top 10 every year in the 2020s aside from that, along with companies like Erliky, Linde and Mitsubishi Chemical.

Some of this is related to M&A.

We've seen some more portfolio movement or at least plans for a portfolio movement so far in 2025. But really M&A has been kind of subdued since mid-2022. And '21 was a hot market, but more for smaller and medium-sized deals. I think there was maybe some cool-off on mega deals after what I'm just going to call the Dow-DuPont era in the late twenty-tens where we saw a lot of mega deals. Plus even though financing was quite loose in 2020 and 2021, I suspect that COVID may have pushed some of that energy towards smaller deals. It's just easier to take a risk with a smaller dollar amount, and the world has really looked quite uncertain for most of the past five years.

So part of this is really just that we have not, the M&A environment has been fairly weak for a few years now. And when it was strong, I think you really saw that strength more on the smaller and mid-sized end of the market. But if you look at the top of the rankings and then say, "Oh, things haven't changed much," that's obviously wrong. Energy transition just became a big topic five or six years ago, and now we've already seen a boom and bust cycle related to energy transition in the lithium sector. And that's impacted the billion dollar club rankings with Albemarle and SQM surging in the rankings in 2022 and '23 and then falling back in '24.

If you look at the rise of China, Sinopec has been a top producer for a while, but other Chinese firms, I mentioned Rongsheng before, have gradually moved up the list. And I also would say that you're going to see some European and Japanese names moving down gradually. Which brings me to a question for you, Rob, as someone who has been involved with Chemical Week for a long time, looking back at some of the history here, what are some of the key shifts we've seen in the industry's competitive landscape over the years and even over the decades?

Rob Westervelt:

It's a continuation of what you have discussed here. The one thing that does stand to mind is really the growth of China. In fact, didn't appear in our list until the 2000s, 2003, 2004, and now you have three companies from China in the top 10. So that's the big one, just how quickly China has become the demand in the production center for the industry. That's been really the story of the industry over the last 25 years. Another, they certainly would have to point out SABIC, the rise of the Middle East producers. SABIC has been the top 10 for 20 years now, certainly that's a notable rise.

The production has shifted to the Middle East. Demands have shifted to Asia, specifically China. So that's driven a lot of shifts in the industry. Also, notable you mentioned the relative declines of the European and Japanese companies. That's certainly been a big trend over the last 20 years. Other companies that are with us are [inaudible 00:07:57], ICI, Union Carbide, Seba E-plastics, now part of SABIC. Roman Haas, like [inaudible 00:08:03] ICI Diceye were top 10 companies.

Even looking at companies like DuPont and Axon AkzoNobel, which were in the 90s to the early 2000s, steady top 10 type companies. And DuPont this year is 39th. Axon AkzoNobel is 41st, I think. So it just shows how these have become more focused companies. They've tumbled down the list as a result. Those are some of the real big changes that I've seen. So it's been, the key thing has been really the rise of China. I guess I'll throw it back to you, where three quarters into 2025, what does that tell us about changes for next year? Do you foresee any changes to the makeup of the list for full year 2025?

Vincent Valk:

Maybe some, maybe not necessarily for 2025, but certainly if you look out a couple of years past that. Just thinking about what's happened so far in 2025, the first half didn't bring any major uplift to demand. Maybe that'll happen in 26. Who knows? We've already discussed the sort of gradual fall in the ranking of European companies and Japanese companies, and I suspect that is going to intensify this year and next year. European companies are continuing to shut crackers, and we're also looking at more rationalization in Japan and also in South Korea. And these moves might boost profitability, but they'll probably mean a lower top line figure for these companies that are shutting plants, and that would translate to a lower ranking in the billion dollar club, and also tell you a little bit about where the production in the industry is going, which as you said, has increasingly been China and the Middle East, and I think today, probably more so China.

But there are also a couple of other things that would keep an eye on for next year and maybe the next few years. First is that while M&A is hardly surging, we are seeing more companies now talking about portfolio actions somewhat in response to the persistently weak or difficult environment. And BASF, the longtime number one company in the ranking, I think they were number one for the sixth consecutive year this year and have been number one for most of the past decade or so, looms large here.

The company declared about $24.8 billion in revenue to be standalone businesses. And if you remove those, that would put BASF's 2024 revenue at about 46 billion, which would put it second behind Sinopec in the ranking and much closer to third place than to first place. And also worth noting that BASF has already said that they're going to IPO their ag business, and they have in a couple of different deals that they've sold part of their coatings business and are looking at selling the rest.

It's by no means clear that BASF is going to sell all of that 24.8 billion in revenue, all of those businesses that they have declared to be standalone. But if you just look at the coatings and ag businesses, that's almost 15 billion in revenue right there. So that would still put them down below Sinopec. Dow hasn't done anything quite so dramatic, but they have gradually shed some assets. And they are also looking at closing plants in Europe, as are a number of other companies. You mentioned Axon AkzoNobel moving down the list. PPG also sold most of their non coatings businesses over the years, and now they've actually sold their North America architectural coatings unit as well.

And AkzoNobel, another great example of that. Some of these coatings companies had other chemical businesses for a time, and they've gradually shed those. And one wonders if that's going to start moving into their coatings businesses, as we saw with that PPG, north of America coatings deal. And DuPont of course, the poster child for a company that has really fallen down the ranking. They just announced the sale of the Kevlar and Nomex businesses and they're spinning off the electronics business. And you mentioned that they were, I think 39th or 40th in the ranking this year. So if you remove those businesses, their revenue falls to below 5 billion, something like 4.7, 4.8 billion, which would put them somewhere around 90th, 87th for the 2024 list, which is really amazing.

Rob Westervelt:

In 2002, they were number one company. Yeah, so they're still certainly one of the most widely recognized names in the industry, but it just shows how much they've changed and how much the industry's changed.

Vincent Valk:

Yeah, yeah. I mean, it's really something to think about. Just with what they've announced they're going to be below 5 billion, and yeah, next year they're probably going to be somewhere in the 80s or 90s, I would guess, provided all of those transactions close in a timely fashion, of course.

Which brings me to something I wanted to ask you about, Rob. Just looking, zooming out here, looking at the bigger picture, we've talked about how there has been a gradual diminishment of some of the big Western diversified chemical makers over the years, and you could extend that out to Japanese producers as well. And now maybe even South Korea. DuPont is the most obvious example, but Dow has also shrank the Dow-DuPont transaction, did some of the vertical integration that they were aiming for back in the 2000s and early 2010s. BASF looks like it's heading in that direction. And if you go back further, as you pointed out, there are more examples. Have investors really soured on the vertically integrated business model? And what can this tell us about the future of the industry?

Rob Westervelt:

Yeah, I think they clearly have soured on the debusment model for now. We're running through an extended downturn here. The diversified commodity portion of the business has always been highly cyclical, but I think it's more than that, this cycle. I was looking at some of the valuation ratios. If you look at BASF, Lyondell, Dow still in the top 10, their enterprise value is below total revenue. So they're trading at less than one times in terms of enterprise value, less than one times revenue. And even looking at some of the more focused companies in gases, coatings, and specialties, like Linde trades at seven times revenue, Sherwin's four and a half times revenue. Ecolab is five times revenue.

And if you look at their valuations, we're at the bottom of the cycle. And for the, we'll call it the diversified companies, the valuations have come down, but it's been nothing dramatic. I mean, their earnings have fallen off the cliff, which is why their valuations have fallen. But their EBITDA ratios are down slightly. It's looking for currently year to date. So BASF, they're trading at 9.1 times. Back in 2015, they were at 8.5 times, Dow's at 6.4 down from eight in 2019, the first year after the Dow-Dupont break up, and Lyondell's at 7.7, so actually slightly above where they were 10 years ago. But if you look at Linde, Sherwin, Ecolab, the evaluation ratio have actually expanded. Think Linde's at 18 times, last 12 months, up from 11 times in 2015. I think that's the Praxair figure. So Linde, Sherwin's at 19 and a half times up from 17, 10 years ago. Ecolab's at 21 times, but up from 14. So it's, the market clearly likes these focused companies in chemicals. So in gases, specialties, coatings, respectively for those companies.

The question is how that plays out and if recovery comes back, is there a rotation back into commodities? I wonder. I think the big diversified guys are in a tough spot between the integrated oil companies and the state-owned companies on one side, and these downstream companies that the market just seems to value. So how that plays out, I think it's a big question. Do we see something happen over the next year or a couple years? But I think something has to happen if investors aren't going to give the big, diversified companies the valuation and the attention that they give. I think just something has to happen.

And it's somewhat, not to get too cute, but it's somewhat strange. If you look at a company like Sherwin, obviously they've done a great job, but if you look at a container of paint, Dow, BASF basically got the propylene derivatives and it's excluding pigments. These are what these diversified companies make, probably 90, 95% excluding pigments that comes from the Dow or BASF. Yet Sherwin has this incredible valuation based on what they're doing. Obviously the stores, they have a huge channel that they've built over time, but they're selling coatings, which is derived from what these upstream companies could use. So that's the big question on how this sorts itself out as industry recovers.

Do the BASFs, the Dow, the Lyondell, so the world come back into favor? Or does the market still tend to want to gravitate toward the more focused companies like Linde, Sherwin, Ecolab and the broader specialty universe and the focused players? And you mentioned DuPont, basically they're going to have a focus electronics component, the focused coating companies, and how that plays out. I think that's going to be the big question over the next two or three years as the industry recovers.

Vincent Valk:

Yeah, I'll just throw a thought out here at you to close it out. I'm curious to get your opinion on this. To provide a partial answer to that question, I don't have the data in front of me, but if you go back to say, the late 2010s when the industry was not in a down cycle and operating conditions were generally pretty solid, the market still favored focused companies, it still favored specialty chemicals and it's still favored focus. And then if you look at a lot of the wave of M&A that happened in that 2015 to 2018 ish timeframe was really about having more focus, not being diversified. We saw activist investors try to make that case at a number of companies. So reading the tea leaves here, it's hard for me to see how the market suddenly turns around and says, "Yeah, we like BASF and Dow and Lyondell."

Rob Westervelt:

Like historically, there's always been a premium for say, the specialty companies. They've been viewed a cyclical, but there's never been a gap like this certainly in the last 30 years. Just how widely that gap between the premium has blown out. The last, let's call it four or five years, has been pretty dramatic. Even for Linde to trade at seven times revenue, they were part of Union Carbide until 1995. Even if you look at their market caps back, even prior to Dow-Dupont, their market caps were still below what Dow was, say, 10 years ago. But the valuation gaps have just blown out. And how sustainable is a big question. There will be a recovery diversity, they'd probably get back some of that. But if that huge gap remains, what are investors going to pressure these companies to do, and how are these companies going to respond if they're not getting the values for what they provide?

Vincent Valk:

Yeah, yeah. It's more a question of how much they can get back. Can they close the gap enough to keep operating in what that they do or justify those operations? Yeah. All right. Thanks very much for your time, Rob. It was a good discussion.

Rob Westervelt:

Great to be with you.

Vincent Valk:

Thanks. And this is Vincent Valk signing off for Chemical Week.