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 from KPMG International.   

In the KPMG Global Chemicals Industry Outlook Survey of 156 senior level chemical executives in the US, Europe and Asia-Pacific, 72% of industry executives indicate that their companies have significant cash on the balance sheet – up from 70% in KPMG’s 2011 survey – and more than half (51%) say their companies’ cash positions have improved from last year.   

As per the survey the emerging-market growth by region, China and India were cited as the two greatest areas for market growth. However, the Middle East placed ahead of Brazil, perhaps reflecting recent weak economic performance of the Brazilian economy combined with strength of the Real. 

“India remains a key consumption market for global chemical players as demonstrated by recent expansions announced. We are also witnessing increasing demand for specialty chemicals especially around end user industries like pharmaceutical, cosmetics, and food,” says Vikram Hosangady, Head - Transaction Services, KPMG in India. 

“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 and a partner in the US firm.  “The improved cash positions at many of these companies will allow them to be more aggressive to drive growth and innovation – both organically and inorganically.” 

Sixty-three% of all executives plan to increase capital spending over the next year. For the second year in a row, 100% of the respondents in Asia-Pacific predicted an increase in capital spending, versus 79% in the U.S. and 58% in Europe.  

Investing in Growth 

The highest priority investment areas are new products or services (35%), and the acquisition of a business (33%). U.S. executives (42% products; 45% acquisition) indicate that they plan to be much more aggressive investing in these respective areas than their Asia-Pacific (26% products; 23% acquisition) and European (36% products; 32% 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.  All of these factors set the stage for aggressive M&A and product development strategies as companies look to gain an edge.”   

Seventy-one% of executives indicate that their companies are likely to be involved in a merger or acquisition in the next two years – up from 62% in KPMG’s 2011 survey.  Once again, respondents in the U.S. were most bullish on being buyers (48%) while European respondents were the most likely sellers (52%). 

Executives also identified technology (29%) and geographic expansion (27%) as significant areas of investment for their companies.  Respondents in Asia-Pacific had the highest expectations for investment in technology (42%), and European executives (32%) 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 US, and Europe as the geographic regions that will be the focus of investment.  However, when analyzing the individual regional responses, US and European executives showed a much stronger preference for domestic investment.  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 counter parts in Asia. 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% of chemical executives in the KPMG survey expect revenue to increase next year – down from 85% in the 2011 survey. Executives in the U.S. were the most bullish in their revenue projections, with 73% expecting revenue to increase next year, down slightly from 77% in 2011.  Expectations for increased revenue among the Asia-Pacific and European executives decreased substantially in the 2012 survey – Asia-Pacific (69% vs. 96% in 2011) and Europe (60% vs. 82% 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 64% saying headcount will increase next year – down from 71% in 2011. Asia-Pacific was most bullish, with 77% expecting to add headcount, followed by Europe at 58% and the U.S. at 56%. In the U.S. 21% of executives actually expect to decrease headcount in the next year (up from 14% in 2011).