End-user segment and market sector analysis
The global chemicals market is roughly €3 trillion in size and, within that, the specialty chemicals market represents around €500 billion (of which paints and coatings accounts for €75 billion). AkzoNobel competes in reasonably selective niches within this very large and diverse market. The outlook for our business, therefore, is best described by evaluating the end-user segments that we serve.
The majority of our Specialty Chemicals revenue comes from the Industrial end-user segment. Many of the different industries incorporated in this broad sector can be somewhat cyclical. However, the cycle for agricultural, for example, is linked to the weather and not to economic cycles. There are also industries that are less cyclical, such as pulp and paper. Furthermore, during the recent recession, the downturn was less than would have been expected as domestic demand in high growth countries continued to lead to robust industrial growth. Taking each of the sub-segments in turn:
Natural resource and energy industries
This sub-segment encompasses a wide range of markets, including oil and gas, metals and mining, energy and electricity generation, water and wastewater and agriculture. In the recent past, oil and gas growth was buoyant as a result of high oil prices. Going forward, we expect this to moderate somewhat, but the outlook for energy and utilities in general remains strong and we are seeing higher levels of growth in agriculture. Thus the outlook for the market sectors that serve this sub-segment is strong, assuming that our position in the market sector is global. For example, we expect good growth in market sectors such as surfactants, chelates, ethylene amines and sulfur products.
This sub-segment covers chemicals and pulp and paper manufacture. Growth in this sub-segment going forward is expected to be somewhat below average globally as chemicals growth is expected to be average and pulp and paper growth is lower than this. However, geography plays a key role when it comes to demand. So, for example, we continue to expect strong growth in pulp production in Brazil, which will lead to above average growth for our bleaching chemicals market sector, which is well positioned in this market. On the other hand, chemicals growth in mature Europe is expected to be limited, and because our chlorine and caustic soda market sectors are entirely Northern European, we are expecting market growth below global average growth rates.
In general, the higher growing industries within the Consumer Goods end-user segment are in the Consumer durables sub-segment, which is small in terms of revenues from our Specialty Chemicals Business Area. However, for market sectors such as organic peroxides, metal alkyls, polymer additives and silica sols used in polymers for the manufacture of consumer electronics, toys and recreation equipment, above average market growth is expected.
There are also some faster growth industries within the Consumer packaged goods end-user sub-segment, such as personal care. As a result, the surfactants and specialty polymers market sectors for these industries are also expecting above average growth. Historically, these industries – along with food and beverage – have experienced lower growth, but are more stable. Recent trends are very positive and we therefore expect average or above average growth for relevant market sectors such as surfactants, chelates and ethylene amines.
Our revenues from the Transportation segment are roughly equivalent to our revenues from the Consumer Goods end-user segment. With the exception of marine transportation, most of the industries in this end-user segment are performing well and the global outlook is particularly strong for the Automotive OEM, parts and assembly end-user sub-segment, which is the only relevant sub-segment for our Specialty Chemicals Business Area. In this sub-segment, we sell chlorine, organic peroxides and metal alkyls used in the production of automotive plastics. Our Chlorine business is very European, though, so on average the relevant market growth for this end-user segment for AkzoNobel is likely to be average, rather than above average.
Buildings and Infrastructure
The smallest segment for our Specialty Chemicals Business Area, our revenues in the Buildings and Infrastructure end-user segment are all in the Building products and components sub-segment. The outlook for this sub-segment is below average, taken as a whole. However, industries within the sub-segment that are less residentially oriented, and/or have a strong maintenance component, are performing better. Our revenues in this sub-segment come from products such as chlorine used in the manufacturer of plastics for windows, doors and pipes, as well as redispersible powders and cellulosic derivatives used in building adhesives and coatings. Market growth for all of these market sectors is expected to be below average, particularly as our chlorine business is heavily European, where growth rates are lower, and redispersible powders have a strong new build orientation.
The vision for the Specialty Chemicals Business Area is to be the leading specialty chemicals company in selected market sectors and a reliable cash generator for AkzoNobel. To achieve this, we will need to continue to ensure that we have strong processes and capabilities in terms of:
We have four main strategic priorities. These are:
Although the emphasis for AkzoNobel in general, and for the Specialty Chemicals Business Area in particular, is on focusing on cash and return on investment, we will continue to invest in people and technology. This is vital for the long-term health of our business.
We will be even more selective in where and how we grow the business, with a strong emphasis on market sectors and geographic regions with better end-user segment outlook. We have done this in the past. For example, recent capital expansions have been almost exclusively in Brazil for bleaching Chemical Islands, and at our Ningbo site in China. Our most recent acquisition was of Boxing Oleochemicals, which has made a major contribution to our Surface Chemistry position in Asia. We will continue to select for these kinds of investments going forward.
We will strengthen our focus on functional and operational excellence. This incorporates continuing to work on building capabilities in product and margin management, complexity reduction, efficiency improvements in factories, operating working capital reduction and ERP rationalization across the full Business Area.
Given all the changes in the external environment, such as shale gas and other chemical feedstock potential game changers, we will be stress-testing our strategies against the changing competitive landscape to ensure that we are well placed for the future.
Key actions going forward
Key raw materials