Investment Cash Available In Chemical Industry Sector
In the face of escalating input costs, stiffer competition, and a struggling global economy, chemical industry executives say they will use the significant cash on their balance sheets to pursue strategic acquisitions and new product development to spur company growth, according to a recent survey by KPMG LLP, the U.S. audit, tax, and advisory firm.
In the KPMG Global Chemicals Industry Outlook Survey of 156 senior level chemical executives in the U.S., Europe and Asia-Pacific, 72 percent of industry executives indicate that their companies have significant cash on the balance sheet â€“ up from 70 percent in KPMG’s 2011 survey â€“ and more than half (51 percent) say their companies’ cash positions have improved from last year.
“Despite economic headwinds, the chemicals sector has experienced some positive momentum in the past year,” said Mike Shannon, global leader of KPMG’s Chemicals and Performance Technologies practice.Â “The improved cash positions at many of these companies will allow them to be more aggressive to drive growth and innovation â€“ both organically and inorganically.”
Sixty-three percent of all executives plan to increase capital spending over the next year. Eighty-one percent of the respondents in Asia-Pacific predicted an increase in capital spending, (down from 100 percent in 2011) versus 48 percent in the U.S. and 58 percent in Europe.
Investing in Growth
The highest priority investment areas are new products or services (35 percent), and the acquisition of a business (33 percent). U.S. executives (42 percent products; 45 percent acquisition) indicate that they plan to be much more aggressive investing in these respective areas than their Asia-Pacific (26 percent products; 23 percent acquisition) and European (36 percent products; 32 percent acquisition) peers.
“Overall, chemical executives are telling us that they intend to put their money to work and boost investment in key areas” added Shannon. “With the struggling global economy, organic growth is a challenge and input prices continue to impact production costs.Â All of these factors set the stage for aggressive M&A and product development strategies as companies look to gain an edge.”
Ninety percent of executives indicate that their companies are likely to be involved in a merger or acquisition in the next two years â€“ up from 83 percent in KPMG’s 2011 survey.Â Once again, respondents in the U.S. were most bullish on being buyers (48 percent) while European respondents were the most likely sellers (52 percent).
Executives also identified technology (29 percent) and geographic expansion (27 percent) as significant areas of investment for their companies.Â Respondents in Asia-Pacific had the highest expectations for investment in technology (42 percent), and European executives (36 percent) plan to increase investment in geographic expansion the most.
As for where they intend to deploy that capital over the next two years, global chemical executives cite China, the U.S., and Europe as the geographic regions that will be the focus of investment.Â However, when analyzing the individual regional responses, U.S. and European executives showed a much stronger preference for domestic investment.Â Unsurprisingly, China remained a favored investment location for executives in all three regions.
Fragile economic fundamentals
Despite the strong focus on growth and expansion, the macroeconomic environment is far more of a worry for executives than this time last year.
Paul Harnick, KPMG’s global COO for the chemicals and performance technologies practice, said, “Executives in Europe and the U.S. are more concerned about the state of the global economy than their counterparts in Asia.Â Balancing potential global economic risks with the need to expand into new products and markets to capture growth will be key to success.”
Less Optimistic Views on Revenue and Hiring
Sixty-eight percent of chemical executives in the survey expect revenue to increase next year â€“ down from 85 percent in the 2011 survey. Executives in the U.S. were the most bullish in their revenue projections, with 73 percent expecting revenue to increase next year, down slightly from 77 percent in 2011.Â Expectations for increased revenue among the Asia-Pacific and European executives decreased substantially in the 2012 survey â€“ Asia-Pacific (69 percent vs 96 percent in 2011) and Europe (60 percent vs 82 percent in 2011).
“Ongoing business challenges such as the prolonged economic crisis, volatile input prices and increased pricing pressures are dampening executives’ expectations,” added Harnick.
Executives also appear less optimistic on hiring, with 65 percent saying headcount will increase next year â€“ down from 73 percent in 2011. Asia-Pacific was most bullish, with 77 percent expecting to add headcount, followed by Europe at 58 percent and the U.S. at 56 percent. In the U.S., 21 percent of executives actually expect to decrease headcount in the next year (up from 14 percent in 2011).
The KPMG survey was conducted in July 2012 and reflects the responses of 156 senior executives in the Chemical industry â€“ 53 in the U.S., 50 in Europe, and 53 Asia-Pacific.Â Based on revenue in the most recent fiscal year, 22 percent of respondents work for institutions with annual revenues exceeding $10 billion, 35 percent with annual revenues in the $1 billion to $10 billion range, and 44 percent with revenues in the $100 million to $1 billion range.