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Continued headwinds make chemical industry cautious about M&A in 2023, according to Deloitte Global report

  • Despite challenges, chemical companies still view M&A as an important driver to help expand portfolios and technical capabilities.
  • ESG moderates as a factor in M&A activities as chemical companies prioritise liquidity and profitability.

NEW YORK, 16 March 2023 - According to Deloitte Global’s 2023 Chemical Industry Mergers & Acquisitions Outlook , 2022 started out with optimism, following on the 10-year high of global M&A transactions in 2021. However, the emergence of serious headwinds ended up dampening overall M&A activity, with 2022 experiencing the lowest level of global chemical M&A volume since 2013 (other than in 2020 with the onset of the global COVID-19 pandemic). Despite this, chemical company executives are again optimistic that 2023 will likely offer them M&A opportunities that may help them grow and enhance their businesses.

The outlook provides the results of Deloitte Global’s Chemical M&A Survey, which assessed sentiments from chemical executives regarding the M&A market and their company’s priorities. The survey polled 54 executives at chemical companies across sectors and geographies between 3-23 January 2023. While the responses indicate optimism for M&A in 2023, the survey indicates there could be a less competitive M&A market in 2023, potentially having impacts on M&A valuations and strategies.

“Uncertainty created by geopolitical tensions and its impact on energy prices is continuing to prompt a more cautious M&A approach by chemical companies,” says Andrew Botterill, Energy, Resources & Industrials Financial Advisory Leader, Deloitte Global. “Add to that raising interest rates to combat concerns around inflation, supply chain issues and the specter of recession, many in the chemical industry will likely be more focussed on weathering disruptions and controlling costs in 2023 and less on M&A.”

Despite these headwinds, a majority of chemical companies are still considering a merger or an acquisition in 2023 as they look to expand their portfolio and technical capabilities as well as expand geographically. The lack of clarity and stability around energy prices, interest rates and the economic outlook, however, is causing some chemical companies to shift away from placing big bets on high-profile M&A deals. Instead, these companies are focusing on small strategic acquisitions versus large transformational deals.

The current uncertainty is also causing chemical companies to concentrate more on their core strengths, technologies and markets, with some looking to divestitures to help advance those efforts in 2023. Interestingly, even as ESG continues to be a long-term priority for many chemical companies, short-term demand and margin headwinds appear to be impacting the priority that some chemical companies are putting on ESG in the short-term.

“Overall, ESG seems to be playing less of a role in M&A decisions right now,” says Botterill. “But even with executives concentrating on more immediate needs, they are still keeping an eye on longer-term environmental goals and aspirations, with M&A as a potential means to an end.”

In the commodity chemicals sector, despite uncertainties, those well-positioned did find opportunities to continue moving down the value chain and grow product portfolios through M&A. And though there was a drop in M&A volume, the specialty chemicals and materials sector saw some of the largest chemical deals in 2022. Fertilizers and agricultural chemicals companies are being impacted by a shift in consumer food preferences as well as a heightened awareness of the environmental impact of agriculture, likely presenting additional M&A opportunities in 2023.

The following are snapshots of M&A activity by geography, as outlined in the 2023 Outlook:

  • Though 2022 saw a significant decrease in M&A volume, the United States fared better than many other geographies. Even so, US chemical companies are prioritising cost-optimisation measures as they navigate uncertainty around feedstock and energy price volatility. The sector also experienced a rise in joint ventures and strategic alliances, with these non-traditional deal types helping to further companies’ energy transition efforts.
  • Demand in China within the chemical industry was weak in 2022, with M&A activity following suit and not yet recovered to pre-COVID-19 pandemic levels. However, new measures by the government are encouraging foreign companies to invest in the chemicals industry as well as vigorous development of China’s advanced chemical materials and fine chemicals sectors. And with the country’s reopening from COVID-19 restrictions, M&A activities in the industry should increase in 2023.
  • The chemical industry in continental Europe continues to struggle to compete with companies from regions with reliable access to cheaper energy. Most deals came from the specialty chemicals sector, with many companies now focusing on expanding their specialty chemicals business model. The transition to circularity and clean energy is expected to also have an increasing impact on M&A.
  • In Brazil, the number of M&A transactions in the chemical industry declined in 2022, principally driven by reduction in demand for commodity chemicals. This reduction followed similar movements in other geographies and may have also been impacted by currency appreciation, making Brazilian businesses a bit more expensive to potential foreign buyers.
  • India has announced several chemical industry-friendly reforms that could lift the industry. Increased infrastructure spending could also improve mobility and facilitate trade for the chemical industry, which can require considerable logistical support for goods movement. The reforms and changing consumption landscape could propel M&A activity in the chemical industry later this year.
  • In Japan, chemical companies are refraining from large-scale overseas acquisitions in favor of profitability enhancements. COVID-19-induced and geopolitical uncertainties as well as a rapid depreciation of the yen have impacted the potential for deal activity in foreign markets. A shrinking domestic market, however, renders it essential that Japanese firms acquire abroad.
  • Chemical M&A activity in the United Kingdom in 2022 remained strong, especially given the geopolitical and economic climate. A prevalent driver of M&A was furthering ESG agendas, attracting a premium relative to more traditional assets. M&A will likely rebound in 2023, particularly for those who may seek to take advantage of a less competitive M&A environment.