2004 has been a very challenging year for the petrochemical sector due to unprecedented price fluctuations, ultimately leading to almost 25-40% increase in prices of feedstock as well as some of the petrochemical products such as polymers. For the past two decades, the global petrochemical industry has been struggling with the dual challenge of growing its business in a mature market while managing costs. But these concerns have become particularly acute during the latest increase in oil prices.

To cope with the new realities, petrochemical producers are pursuing diverging paths of consolidation on the one hand and divestitures on the other. The equation of profit and loss spells out only two possible solutions for companies seeking to improve their bottom line: boost revenue or cut costs. In the case of petrochemicals, producers have been pursuing a mix of both. On the revenue side, companies have been attaching greater importance to enhancing shareholder value to seek quantum growth through external acquisitions or IPOs. R&D innovations leading to internal organic growth have declined in importance. On the cost side, efforts to streamline operations have been motivated by the growing sensitivity of petrochemical prices to crude oil prices, with cost savings being the key word in various spin-offs.

Price sensitivity of petrochemicals in co relation to crude oil prices is increasing over the past decade. From an average of 50% in the last decade of the 1900s, the correlation between WTI crude and global ethylene prices have climbed to over 80% by 2004. This stronger connection implies higher volatility in petrochemical prices corresponding to current volatile oil prices. This is indicated in increased volatility in ethylene prices, from as low as 6% in the early 1990s to over 10% in 2003 and 2004.

Notwithstanding these factors, the petrochemical industry has prospered as end-product prices have climbed at a pace faster than oil prices. With more profits at their disposal, petrochemical companies are now in a position to pursue large-scale acquisitions to achieve new growth targets, taking mergers and acquisitions (M&A) to a new level, and even renewing pursual of acquisitions that may have been shelved in the early 1990s. Perhaps the most active center of M&A activity this year has been Europe, with 2004 being dubbed as the year of European spin-offs. Oil majors such as BP, Shell, and Total, and chemical giants such as Bayer and BASF are all looking to divest their petrochemicals portfolios to escape the cyclical and generally low-margin business of commodity chemicals.

An overview of global M & A scenario :
Producers that have undertaken M&A to improve their bottom line:
  Blackstone take over of Celanese, and Lyondell's plans to acquire Millennium Chemicals. Both are producers of acetyls in USA and both are short of ethylene feedstock.

 Saudi Arabian petrochemical giant SABIC bought DSM’s petrochemicals business in 2002, signalling the exit of DSM from basic polymers to developing its high-value-added specialty and fine chemicals segment.

 In Korea, Honam and LG Chem bought out Hyundai Petrochemical. The process will continue with the buying out of KP Chemical. Atofina’s purchase of a stake in Samsung Petrochemical is the largest foreign investments in Korea’s petrochemical sector.
Producers seeking to shed unprofitable parts of their business, changing over from commodity plastics to higher value chemicals:
Shell and BASF announced plans to sell their stakes in Basell, a 50/50 polyolefins joint venture.

Many of the issues facing the petrochemical industry today have been a continuation from the past several decades: the highly cyclical nature of the commodity chemicals markets, periodic capacity gluts, matured/maturing markets in the developed economies, and the trend toward globalization. The difference lies in the closer linkages among the various markets and regions of the world and closer scrutiny of companies to perform for their shareholders. This indicates an element of uncertainty for the industry.