ICI struggles to stay in trim

The slimmed-down giant is fighting for efficiency, but is that enough to cope with the downturn?

IMPERIAL Chemical Industries, formerly tagged by the stock market as the bellwether of British industry, is in many investors' eyes only half the company it used to be.

That is a direct consequence of the demerger of Zeneca two years ago, when ICI hived off its pharmaceuticals operations. The feeling was that the pharmaceutical side was being undervalued as part of the wider group, so it was split off to reveal its true value.

The corollary is that the real value of the rest of ICI was exposed to public scrutiny. And now, as the chemical industry approaches the top of its cycle, the City's analysts are questioning how well the group is positioned to cope with the approaching downturn.

Sir Ronald Hampel, who took over as chairman from Sir Denys Henderson last month, was chief executive at the time of the demerger, and his response to ditching the glamorous pharmaceutical interests was to give the new ICI tough performance standards, claiming that in the 1980s the good businesses had not been driven hard enough.

First he effectively carried out a second demerger, by pulling out of the loss-making petrochemicals and chlor-alkali industries. The remaining parts of the group - paints, explosives and industrial chemicals - were told they had to earn an average return on capital employed of at least 20 per cent over five years. That was to be subject to a minimum of 10 per cent at the bottom of the cycle, implying that they really had to rake in the money in the good times - or else the "for sale" sign would go up pretty fast.

The tidying-up operation shows no sign of abating. Last week ICI paid £180m for Grow Group, the US architectural paints and coatings company, transferred its end-user liquid CO2 business to Norsk Hydro in return for long-term bulk CO2 supply contracts, and went into a joint venture in India with Zeneca to make crop protection products.

Sir Ronald arranged a fine send-off for Sir Denys, with first-quarter figures showing pretax profits more than doubled from £103m to £244m. This deluded some commentators into claiming that at a stroke it justified the Zeneca demerger, but the more cautious analysts took the view that it only heralded the beginning of the real battle.

Charles Lambert, chemicals analyst at Smith New Court, said: "The numbers are being driven up rapidly by the commodity chemicals side of the business, which is deemed least reliable. The more buoyant the numbers, the more the concern about how long that will continue. It makes it hard to see what the future holds."

While this may seem unfair and even curmudgeonly, it is a fact of life in cyclical industries. On the way down it is hard for investors to think of anything else, but on the way up the critics are wondering what happens on the other side of the hill.

As Sir Ronald stepped up to be chairman, so the chief executive's baton passed to Charles Miller Smith, who had previously been beaten in races to run Unilever and Barclays, and joined the ICI board last year.

Mr Miller Smith pointed out: "We are going to do the same as before, but pursued more energetically. ICI has gone through a lot of change in the last five years, but we have concentrated on three themes:

"1 Strong focus on businesses where we can have real competitive advantage by our technology and our position in the market;

"2 Rigorous search for value, building stronger businesses;

"3 Responding to changes in the worldwide market. We are enjoying rapid growth in Asia."

Apart from the relentless search for more productivity and efficiency, Mr Miller Smith wants to add value to some of the products by targeting them at particular specialist markets. In this way he hopes to lift them out of the commodity category and find reasons for raising their prices and squeezing more profit out of them.

As part of that drive, ICI has separated out its car paints business into a strategic business unit, ICI Autocolor, aiming at the world's 500,000 car bodyshops and commercial bodybuilders. They buy £3bn of paint a year in repairing 20 million vehicles, subject to a variety of environmental laws and the varying requirements of the leading car-makers.

That means more intensive training of ICI staff and the repairer-customers, but the payback is fatter profit margins.

As far as the bulk chemical business is concerned, no amount of smart marketing will open the industrial customers' chequebooks any wider. Mr Miller Smith is confident - well, he would be, wouldn't he? - that ICI is pushing efficiencies hard enough to withstand the downturn he agrees is not far off.

He said: "You can't protect yourself wholly, but you can make the business as robust as possible. If you are in genuine leadership positions, it's easier to deal with the downturn."

While the analysts on average expect ICI to improve 1996 profits from £713m to £870m, Mr Lambert's view is that ICI's medium-term fate is out of its own hands, in that it is dependent on the course of the US, UK and Australian economies.

"Given those economies' combined prospects, the outlook for 1996 could be pedestrian," he warned.

The shares should be avoided until the chemicals cycle shows signs of turning up again.

Activities Paints (Dulux, Glidden, ICI Autocolor); materials (acrylics, plastic films, polyurethanes); explosives; industrial chemicals (PET resins, surfactants, catalysts, titanium dioxide pigments, CFC replacements). Share price 745p Prospective yield 4.8% Prospective price-earnings ratio 13.8 Dividend cover 1.9 1993 1994 1995* Turnover £8.4bn £9.2bn £10bn Pre-tax profit £374m £408m £713m Net profit £257m £188m £367m Earnings per share 35.7p 26p 54p Dividend per share 27.5p 27.5p 29p (* forecast)

people'It can last and it's terrifying'
Radamel Falcao
footballManchester United agree loan deal for Monaco striker Falcao
Louis van Gaal, Radamel Falcao, Arturo Vidal, Mats Hummels and Javier Hernandez
footballFalcao, Hernandez, Welbeck and every deal live as it happens
footballFeaturing Bart Simpson
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
news Video - hailed as 'most original' since Benedict Cumberbatch's
Arts and Entertainment
booksNovelist takes aim at Orwell's rules for writing plain English
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

.NET Developer

£650 per day: Harrington Starr: .NET Developer C#, Win Forms, WPF, WCF, MVVM,...

Day In a Page

Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Fashion walks away from the celebrity runway show

Fashion walks away from the celebrity runway show

As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

Meet the stars of TV's Wolf Hall...

... and it's not the cast of the Tudor trilogy
Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

Europe's biggest steampunk convention

Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
Don't swallow the tripe – a user's guide to weasel words

Don't swallow the tripe – a user's guide to weasel words

Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

Daddy, who was Richard Attenborough?

The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor