The Future of European Chemicals: M&A as a method of consolidation - friend or foe?

We could be on the cusp of a wave of European diversified / commodity chemicals M&A. Management teams have spent years talking about a need for consolidation in Europe, in order to help address the competitiveness gap versus the rest of the world. But rhetoric could start to become action. With no imminent change to Europe's relative cost position, earnings momentum at least becoming less negative, and Chemicals market caps / index weights declining, M&A could tick up with BASF-Evonik (NC) at the vanguard. For investors, the key questions are identifying the possible targets in the short-term and the success of mergers over the longer term. We see the need for consolidation in some form, but large M&A deals do not always have a good track record of value creation and this is not a fix for Europe's structural issues. We believe good mergers can be derailed by tough macro conditions, whilst bad deals can succeed with sufficient market tailwinds.