Western chemical companies outperform Asian companies in TRS

In terms of regional development, chemical companies in the United States and Europe have surpassed their Asian competitors in the past three years. This marks the emphasis on a trend since 2009: the Americas perform best, only ahead of Asia (excluding Japan) and Europe. However, looking back 15 years ago, Asia was generally better than other regions.

There are many possible explanations for this recent trend. First, the performance of TRS in Asia shows the impact of over construction of production capacity in the region in the first decade of this century, resulting in the decline of profitability. The second explanation is that large investors in Europe and the United States have benefited from the economic recovery since 2009. In addition, some companies also benefit from the low price of shale gas raw materials in North America; many European companies also have a wide range of business in North America, so they also benefit from the unique raw materials.

The chemical industry has been working well, but how long can this superior performance last? The leaders of chemical companies are very clear that the capital market will not reward those players who remain static.

Various factors contribute to better shareholder performance. For specialty chemical companies, strong returns may indicate how company valuations reflect technological innovation, intellectual property based barriers to entry, and privileged customer engagement. In the field of commodity chemistry, many companies have overcome regulatory barriers and successfully implemented capital expenditure plans to benefit from superior raw materials.

How can a company maintain these high levels of ROIC, or even improve it? ROIC is determined by factors that can be controlled by the company's management and factors that cannot be controlled by the management. Although manufacturers of specialty chemicals and bulk commodity chemicals can control their own cost status, excellent operation, working capital and mergers and acquisitions, specialty chemicals companies have more control over the pricing of the end market. It is almost self-evident that commodity manufacturers are subject to market pricing. As we can see in exhibition 4, it is not a coincidence that professional chemical company leaders' ROIC performance, considering that their business is built on the unique competitive advantage, is based on their choice of products or services and end markets, and of course, their choice of market favorable dynamics. In contrast, commodity participants are more vulnerable to external factors beyond their control, such as oil price, naphtha ethane spread, octane slope, by-product demand and potential market demand.

Playing with these different forces supports one of the enduring characteristics of the chemical industry: dynamic turnover within the sector, leaders and laggards. Our latest analysis of how the company's position changes with regard to economic profit performance 2 between the two periods - 2004-2008 and 2009-2013 - shows that nearly 40% of the quintiles top drop out, and the bottom quintiles last 14% of the array. At the same time, 50% of the people with the lowest income rose, and 7% of them went all the way to the highest one.

For leading chemical companies, the message is to either use it or lose it. Companies in the elite have the privilege of mobilizing capital. In addition, they should make sure that they know the secret of success and watch the signs of change warily, rather than stay on their own honor. Our analysis shows that the mobility patterns show that the top five companies are almost equally likely to fall to medium or lower companies. But it's not easy to "make good use of it": for example, our analysis shows that many companies sliding from the top to the middle or bottom are actively making acquisitions, which may not achieve good results. Companies in the middle usually lack sustainable competitive advantage, and they are faced with a protracted battle while catching up with the industry trend.

For companies at the bottom, the challenge is often their weak ROIC performance. Companies that can't afford the cost of capital are in a situation where any investment that tries to grow is equivalent to putting money into another mess; their first task is to improve the ROIC and give themselves the right to development. The external environment also helps: favorable shale gas based raw materials are a major success factor.