In terms of geographical location, the chemical industry is the best in America. Their compound annual growth rate fell by only 1%, as the generally active US economy and the strong performance of the US stock market partly offset the less positive view on chemicals. The worst affected region is Japan, where the trend has been amplified by the valuation of chemical stocks. In addition to Japan, sales of chemicals in Asia are also declining, in line with the market trend. In Europe, the decline of the chemical industry exceeded that of the market, reflecting the overall economic performance and downturn in the region, especially the pessimism about the prospects of European manufacturing industry.
Since the end of 2017, the TSR of the chemical industry has been weak and has dropped from the top of its value chain. From 2000 to the end of 2017, the chemical industry is obviously the leader of TSR in its value chain. Even in the medium term (five years since December 2013), it is still ahead of most of its value chain, though only slightly. But in the past 18 months, the chemical industry has lagged behind upstream companies in its value chain and pharmaceutical industry downstream – although it has performed better than most other downstream customers.
Why is the chemical industry facing new challenges
Is the current decline of capital market another temporary setback, or is a new destructive trend at work? Our research shows that the chemical industry is indeed entering a new field, and this time it will face more profound challenges.
Since 2000, the chemical industry has benefited from a strong combination of factors driving its performance. The first is the industry’s efforts to increase productivity. By maintaining and strengthening its position in the value chain at the same time, it has been able to maintain these benefits.
The second factor is more intrinsic to the chemical industry. With the emergence of new trends, from lithium chemicals for electric vehicle batteries to the necessities of working inside smart phones, many companies have used their innovation capabilities to find profitable growth areas, which play an important role in most aspects of modern life. Many of the industry’s intellectual property rights and know-how are difficult to obtain, which puts established companies in a strong position.
The third is “China effect”. “In the past 20 years, China’s economic growth has outpaced the growth of its chemical production. While meeting domestic demand, North American and Western European producers have also made up for the stagnation of the domestic market. At the same time, other emerging market countries have also provided demand growth, though not as large as China.
The industry has also benefited from other developments that are not directly related to its own efforts. In these developments, it is worth noting that the low price natural gas raw materials in the Middle East and North America brought unexpected profits to petrochemical producers; from 2000 to 2013, the prices of agricultural products continued to rise, which helped agricultural chemical raw material producers.
Our research shows that the future of these drivers is less certain than in the past. For example, although China’s chemical market (now the world’s largest chemical market) is expected to continue to grow, investors generally believe that the increase of new domestic production capacity in China will not be conducive to the profitability of the chemical industry in the future.
Trends in the petrochemical industry are another example. In the past four years, the improvement of the profitability of the petrochemical industry has made an important contribution to the profitability of the whole chemical industry, but now it is playing a role. Not only has the contribution of low price raw materials been included in the valuation, but the profitability of the industry looks likely to decline due to the massive capacity increase we mentioned.
