The handy website XmasClock.com tells us that we are over halfway through the year to Christmas. But before anyone starts panicking over what presents to buy, it is time to take stock on this year’s chemical industry progress. How has it performed over the last few months, and what does that tell us about the future for chemical production and supply?
How has the Chemicals Industry Been Performing?
While the chemical industry gave investors returns equal to other sectors from 2012 to 2016, the past two years have begun to show massive increase in return from investment. As chemical industry consultants as McKinsey noted in report from May 2018, stating, “Since mid-2016, chemical total return to shareholders performance has taken off again, posting a CAGR of 24 percent, compared with the world market’s 19 percent. The principal reasons have been a combination of a sharp increase in M&A activity across the chemical industry, which investors have generally supported, and a more favourable supply–demand position for petrochemical producers that has generated strong earnings growth.”
How is the Chemicals Industry Doing Now?
Most financial investors agree that the chemicals industry is in a strong position. As chemical industry experts at the investment consultancy Zacks noted in a recent report, “The chemical industry is riding an upturn in the world economy and continued strength across major end-use markets such as construction, automotive and electronics. Another positive for the industry is a recovery in demand in the energy space – a key chemical end-market that had been out of favour for a spell.” Adding that, “The recovery has also been driven by the rebound in crude oil prices from their historic lows.”
Beyond oil price fluctuations, other factors have also been in play to create the chemical industry’s strong position. These include:
The Return of the EU Chemical Sector
The European chemical industry has been in much better health following years of stagnation. This is largely due to improved economic growth in the Eurozone, which has brought with it increased consumer confidence and lower unemployment.
The recovery is evident in data from Cefic’s June 2018 report (pdf), which states that, “Production in the EU chemicals sector grew 1.9% from January to March 2018 compared to the same period of 2017. Producer prices were above the previous year’s level, growing 2.5% in the EU chemicals sector from January to March 2018 (y-o-y).” Additionally, “EU chemicals exports reached a value of €26.4 bn through February of the current year, rising by 1.5 bn (+5.8 per cent) compared to the first two months of 2017.”
Increased Chemical Industry Investment
In an industry famous for requiring high levels of investment the fact that large capital expenditure projects are going ahead shows signs of a healthy industry, especially in America. As Zacks notes, “The shale gas boom has incentivized a number of chemical companies including industry heavyweights such as BASF and LyondellBasell to invest billions of dollars to beef up capacity. According to the American Chemical Council (ACC), roughly 320 chemical projects have been already announced worth more than $185 billion, 62% of which is foreign direct investment.” Adding that, “The ACC expects chemical industry capital spending to rise 6.3% in 2018 and 6.8% in 2019 and eventually reach $48 billion by 2022.”
M&A’s Showing Value
The large number of mergers and acquisitions that have occurred over the past few years are also now bearing fruit. Cost-cutting measures such as plant closures and reduced staffing, as well as synergy opportunities and economies of scale are all aiding chemical industry growth.
US Chemical Industry Recovering
The US chemical industry had a difficult 2017, with hurricanes Harvey, Maria, and Irma causing an estimated $200 billion worth of damage. Harvey was particularly damaging, as it flooded Houston and much of its petrochemical base, although all 17 named storms of that year caused infrastructure damage, as well as affecting production, imports and exports.
With the Autumn 2017 hurricane season now passed, the industry has now generally recovered, and business is back to normal. The ACC is now predicting US chemical industry growth for 2019 of 3.9%.
You can read more about the Chemicals Industry’s Future on SPOTCHEMI‘s parent company AG CHEMI GROUP‘s blog page.
The Year Ahead for Chemicals
Chemical Industry Challenges
But despite the positive news of progress and expansion in the global chemical industry, there are still worries among chemical industry producers. For example, there is concern over a recent spike in raw material prices, with the supply chain from American suppliers having only just recovered from the hurricane season, whilst China’s ‘Blue Skies’ policy is also affecting basic chemical output.
There are also concerns over China’s general economic well-being, as recent years have seen a dip below the double-digit growth of the previous decade coupled with fears of a housing bubble.
Zacks also acknowledges potential problems in agrichemical markets, noting that, “Chemical makers also continue to feel the pinch of depressed demand in agriculture markets. Sustained pressure on agricultural commodity prices is scuttling a meaningful recovery in this key chemical end-market. The outlook for the fertilizer and agricultural chemicals space remains cloudy due to continued weakness in crop prices, low farm income and sluggish economic conditions in certain emerging markets, including Latin America.”
Fears of a global trade war are also present, especially following June’s G7 summit.
The Chemical Industry’s Bright Future
Despite these bumps in the road ahead, the chemical industry has gone from strength to strength over the past two decades, even bouncing back strongly after the 2008 financial markets depression. As a result, the industry is likely to continue its upward trend in increasing output, value, and research levels.
Even in the short term with the threat of a trade war looming, predictions remain upbeat. As Zacks notes, “While the chemical industry still faces a few headwinds, its momentum is expected to continue this year on sustained demand strength across light vehicles and construction markets, a rebound in demand in the energy place and significant shale-linked capital investment. Strategic actions including expansion of scale through acquisitions, operational efficiency improvement and continued focus on cost and productivity should help chemical makers weather the macroeconomic and industry-specific headwinds in 2018.”
You can read more insights into the chemical industry and chemical industry markets at the SPOTCHEMI blog page.
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