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Deal value and volume in the chemicals industry during 2023 remained subdued, primarily due to an extended cycle of rising interest rates, heightened global conflicts and concerns about a potential recession. Weaker demand and increased feedstock costs added pressure to the profitability of chemical companies, resulting in hesitancy surrounding M&A opportunities. Nevertheless, we cautiously anticipate 2024 to be a pivotal year for chemical M&A if interest rates moderate, economic uncertainties diminish and more assets become available in the market.
Continued tight monetary policies coupled with peak financing costs have led to a recent slowdown in chemicals M&A. Megadeal activity has been minimal, with only one announced in the third quarter of 2023, and most activity occurring in the middle market. Ongoing conflicts in the Middle East and the Russia-Ukraine war further contributed to a decrease in international deal activity. European deals have been muted due to margin pressure from significant increases in feedstock costs caused by supply chain disruptions.
On a positive note, the high energy prices prompted cash-rich Middle East national oil companies (NOCs) to actively pursue downstream chemical assets, focusing on sustainability considerations and the energy transition. The aging of private equity (PE) portfolio companies is expected to bring more attractive assets to the market in early 2024. Companies may seize this opportunity to engage in transformative deals, consolidate market positions and capitalize on synergies and economies of scale. Simultaneously, divestiture of non-core assets for portfolio optimization, scrutiny of supply chains and the increasing pressure on companies to decarbonize and fulfill sustainability obligations are fundamental themes expected to drive M&A in the short term.
Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.
“While chemical M&A activity scaled back in recent months amid geopolitical tensions and a stringent financing environment, there is cautious optimism of a rebound in 2024.”