Forecast for the chemical industry in general
Compared to 2010, CEFIC (European Chemical Industry Council) expects a relatively moderate 2.5% increase in European chemical output for 2011. This is due to the prevailing uncertainties in the market regarding the development of the euro and U.S. monetary policy. The high demand for chemicals, particularly from the Asian region, is pushing up the prices of basic chemicals, which, according to CEFIC forecasts, will create a fear of destabilizing price peaks. In addition, many governments will be forced to adopt cost-cutting measures and to reduce or eliminate state spending in order to stimulate their economies.
The German Chemical Industry Association (VCI) forecasts that international production output will grow by 2.5% in 2011, with sales rising 4% to EUR 177.4 billion. This forecast expects 2010 output and capital expenditure to be 0.6% and 4.6% higher, respectively, than the peak levels of 2007, which was the best-performing year for the German chemical industry to date.
Forecast for the Merck Millipore division
With the acquisition of Millipore, we have created a successful business model for the life science industry, in which we will occupy a strong market position in the future as well.
For the Merck Millipore division, which generated total revenues of EUR 1,613* million in 2010, the Executive Board forecasts that total revenues will increase between 51% and 56% in 2011 and will increase again in 2012. Based on an operating result of EUR 48* million in 2010, this is expected to rise significantly in 2011 and to increase further in 2012.
The significant changes in total revenues and the operating result are also due to the fact that the newly acquired Millipore business was only consolidated for six months of 2010. Moreover, it must be noted that the inventories from the acquisition were already recognized at fair value and thus stepped up by EUR 86 million. This amount was fully expensed in cost of sales in the second half of 2010, and had a one-time negative impact on gross margin. As a recurring expense, the result includes the write-downs on intangible assets to their fair values resulting from the acquisition of Millipore. Amortization is expected to amount to around EUR 200 million for both 2011 and 2012. In addition, further integration costs are expected for 2011.
The new Bioscience Business Unit of Merck Millipore develops products that help scientists to better understand complex biological systems and to discover and develop new therapies. The extensive product portfolio of Merck Millipore is well positioned to grow in the dynamic bioscience market, parts of which will continue to face challenges. For this division we see risks particularly associated with the consolidation and restructuring of the pharmaceutical industry, but also with the expiration of patents and the development of new products. The Lab Solutions Business Unit supplies a broad portfolio of innovative, reliable high-quality products for general laboratory applications in a wide variety of industries. Growth is achieved by offering excellent products and direct sales. In addition, opportunities are arising in China, India as well as North and Latin America, where we want to grow with the market in coming years. For the new Process Solutions Business Unit, opportunities lie particularly in the strong sales growth and product portfolio of our customers and of our products for chromatography. The most significant risks are associated with the cost pressure in the biopharmaceutical industry and delivery by other suppliers.
Overall, we aim to achieve significant growth in the result in an uncertain market environment by offering a broad product portfolio, aligning our business globally, leveraging regional strengths and identifying synergies.
Forecast for the Performance Materials division
In the Performance Materials division, Merck is estimating that the total revenues of EUR 1,452* million in 2010 will increase in 2011 by between 2% and 7% and will continue to rise in 2012. The operating result of EUR 576* million is predicted to remain unchanged in 2011 and to resume growth in 2012.
This division supplies specialty chemicals and materials for liquid crystal displays and for new lighting and display technologies such as OLEDs (organic light-emitting diodes), as well as effect pigments for the plastics, print and coatings industries. Merck pigments are also used in skincare and in color cosmetics. The division is also active in growth markets in the field of renewable energy.
DisplaySearch, a market research company for the display industry, predicts that the liquid crystal display market will continue to grow. The LCD market is being driven by the heavily increasing demand for TVs and notebooks in the emerging economies of Asia, as well as by devices such as tablet computers. According to the opinion of market researchers, the total surface area of liquid crystal displays should grow 8% per year on average between 2010 and 2017. This includes televisions, monitors and notebooks, among other products. For 2011, DisplaySearch is expecting the surface area of liquid crystal panels to increase by 11% relative to 2010. Flat panel production has so far been concentrated in South Korea and Taiwan, followed distantly by Japan. According to Display Search, however, China will have assumed third place by the end of 2012.
Since producers of automotive coatings are one of our customer sectors, the development of automotive sales figures is important to us. The U.S. market researchers from CSM Automotive predict that global automotive sales will grow in 2011 by 11%, rising to 61 million vehicles. This will put the automotive industry back at the level of 2008, but will still not as high as in 2007, which was a very good year. According to market researchers, the Indian market will show the strongest growth in 2011, followed by China, Brazil and South Korea. JD Power, a marketing information firm, is expecting production of 73 million cars in 2011, which would significantly exceed the 70.4 million vehicles sold in 2007, a record year. However, this growth is predicted to come only from emerging markets. The market research firm Polk is predicting a further increase in production, to 78 million cars in 2012.
Euromonitor, a key market research company for the cosmetics industry, predicts growth of 5.2% to USD 369 billion for the personal care and cosmetics sector in 2011 and further growth of 3.7% in 2012 relative to 2011. Performance Materials is also active in this market.
Additional opportunities for the Liquid Crystals Business Unit lie in the improved business performance of the display markets. For our PS-VA technology, we are expecting very satisfactory increases as a result of market growth. To maintain our leading technology position in liquid crystals, we will correspondingly intensify our R&D activities. Programs for increasing production efficiency will help keep the operating result at a high level. We face particular risks due to price pressure in the area of LC materials and due to the possible emergence of new competitors on the market. In view of Merck’s so far dominant position, the emergence of competitors particularly in PS-VA technology could negatively impact sales and the operating result.
The Pigments and Cosmetics Business Unit has recovered significantly from the crisis year and will continue to grow in the coming years. The portfolio will continue to shift toward high-quality products. Opportunities and risks are especially linked with the growth of the automotive industry. This sector is showing a trend toward high-quality paints, an area in which Merck is extremely active. Other opportunities could arise from a shift in the automotive industry from the current trend of white-silver and black hues back to bright colors.
* Figure adjusted to reflect the new reporting structure