This excerpt taken from the ICI 6-K filed Mar 21, 2007.
Market trends and sensitivities
ICIs businesses market and sell their products within a wide variety of industry sectors and geographic regions. The Group strategy focuses on achieving higher levels of profitable growth, including where the markets are considered to be inherently attractive (e.g. high levels of GDP growth, increasing consumer demand for particular products or services or opportunities to expand ICIs coverage quickly). Key areas of focus include Asia (particularly the fast-growing economies of China, India, Indonesia and Vietnam), the global electronics components industry and the global specialty polymers businesses of National Starch.
There are underlying trends in these different markets that the Group believes make them attractive for its businesses, but similarly there are associated risks to growth expectations should the relative rates of growth change materially. ICIs exposure to these markets is set out in the strategic review and the individual strategies of its businesses are explained in their descriptions starting on page 12.
The following comments provide more detail on the trends that the Group believes will benefit long-term growth as well as some of the sensitivities that may affect performance relative to these trends. More detail on these and other risk factors can be found in the following section. These comments should also be reviewed in conjunction with the forward-looking statements disclosure on page 155.
Asia Pacific: ICI has a well-established position in Asia, particularly ICI Paints and National Starch. Their products are sold into growth segments of local economies. ICIs businesses in Asia are well placed to benefit from the expected GDP growth in these economies.
In addition, ICIs major international customers are investing in capacity to service domestic and export markets. Growth estimates remain strong for the region and one or two countries in particular. Recent figures supplied by Oxford Economic Forecasts indicate that Chinas Gross Domestic Product in 2007 is expected to grow 9.6% and India 7.6% . ICIs grow aggressively businesses are to a large extent dependent on the successful development of these economies and, should the economic outlook change, this would impact favourably or unfavourably the Groups rates of growth.
Healthy eating: National Starchs starch operations are currently benefiting from the trend towards healthier eating. In general, processed foods have historically had higher levels of fat, salt, sugar and other carbohydrates to overcome issues with cooking cycles, storage and mouth feel. The development of resistant starches that can substitute the culinary impact of other carbohydrates creates a range of market opportunities, driven mainly by consumers preferences for convenience, but also for a healthier product. Changes in these trends could impact, favourably or unfavourably, upon the performance of this business.
Electronic materials: National Starch manufactures a range of high performance adhesives and protective coatings for the electronics industry. The trend towards miniaturisation and more powerful electronic devices has historically contributed to greater demands on the technical capability and value of ICIs products, as well as driving higher volumes. As a result, the business has grown successfully.
ICI believes that the electronics market, whilst likely to remain more cyclical than most, will continue to grow and present National Starch with sustained opportunities to introduce new technologies. Against this backdrop, individual market cycles may have a short-term impact on the business.
Other markets to which ICI has a large exposure or other factors which ICI believes can influence its performance are described below, together with ICIs views on the underlying trends and sensitivities.
Western European and North American markets for fast-moving consumer goods products and construction materials: ICIs businesses manufacture and sell a wide range of products used in the home or construction industries. ICIs performance in these markets is linked to underlying GDP growth, consumer spending and other market-specific trends. For example, ICI Paints is currently experiencing lower demand in the USA, related to a weak housing market.
Oil prices and raw material costs: ICI is exposed to changes in the relationship between supply and demand for key materials. For example, the cost of acrylates (used by both National Starch and Paints) increased rapidly during 2005 and the cost of corn, used by the specialty starch business, has already risen sharply in 2007.
Higher oil costs impact the petrochemical raw materials bought by the Group. More details of the types of raw materials bought by ICI are included on page 22. As in 2005, ICI Paints and National Starch were able to pass on these raw material cost increases during 2006.
Energy costs: Approximately 80% of ICIs continuing businesses by sales value manufacture their products using mixing or compounding operations, rather than capital intensive, energy intensive processes, for example, paints, adhesives and electronic materials. 20% are capital and energy intensive processes the starch manufacturing facilities of National Starch and the Regional and Industrial activities in Pakistan. These businesses have some exposure to energy price fluctuations; for example, National Starchs starch operations suffered from significant increases in natural gas prices during 2005.
PTA to paraxylene (PX) differential margin: the profitability of the Regional and Industrial business in Pakistan is significantly affected by the market price differential between PTA selling prices and the cost of the key PTA feedstock, paraxylene. Pakistan PTA Ltd currently benefits from local tariff protection due to expire in 2008; the continued sustainability of the business would be dependent on the outcome of discussions with the government to review ongoing tariff protection.