Factors driving the increase of ROIC in chemical industry
After a strong rise from 2001 to 2014, the chemical industry’s TRS has lagged behind the market since 2015. Earlier, ROIC, a key value driver for the industry, grew faster than the broader market. Income growth in the chemical industry was also slightly faster. However, the overall ROIC market has continued to decline since 2015. At the same time, the growth of the industry has slowed down, and these deteriorating indicators have led to poor performance of its trs.
However, in the past two years, some companies have done significantly better than other companies in various fields of Chemistry: for example, we see a difference of 7% between the highest and lowest ROIC in specialty chemicals, chemicals, 8% difference and 9% difference in diversified chemicals. As for income growth, the gap between the top quartile performers and the bottom quartile performers in the three sub sectors is 10, 12 and 8 percentage points, respectively.
What’s the difference between the top performers in each industry segment? Obviously, there are many factors driving the improvement of ROIC and the growth of revenue. Some are beyond the control of chemical companies, such as oil prices or exchange rate movements. But they can position themselves in a growing and profitable market by actively managing their own portfolios, using operational excellence, business models and talent.
Endowment effects can also be important: in the field of basic chemicals, for example, winners have strong exposure to emerging markets or have access to superior raw materials. But poor execution can waste these benefits, so management teams can’t ignore functional excellence. In general, they should focus on the healthy growth of the total supply and demand chain. Companies that use these positive factors to drive ROIC and revenue growth outperform their less efficient peers – again, the experience of the chemical industry confirms the fundamentals of value creation. Similarly, the endowment effect is important in the field of specialty chemicals: the most successful participants are active in particularly attractive sub areas, such as agriculture or paint and coatings, and focus on ROIC.
Innovative business models, including capital efficiency growth, are another successful model. For example, many successful professional companies have pushed capital intensive synthesis steps to upstream suppliers and focused on the formulation and distribution of their respective sub sectors, which helps their ROIC performance.
In the view of some observers, the basic value principle of the chemical industry sub industry can be summarized as a long-standing motto: “specialized chemicals make money, basic chemicals make money, but diversified companies are struggling.” However, it is not natural for diversified companies to perform poorly: their performance is also widely distributed. The most powerful of these companies provide valuable experience: they have adjusted their portfolios over time, improved ROIC, and positioned themselves in faster growing end markets and regions. As the huge difference in performance shows, the type of foundation or specialty of a chemical enterprise is more important than its executive ability.