Sector News

Chemicals and capital markets: Searching for a way back to the winner’s podium

November 27, 2019
Chemical Value Chain

Acombination of uncertainty about worldwide economic prospects, geopolitical tensions affecting trade, and the waning phase of a global economic-expansion cycle have all put pressure on chemical-industry performance in capital markets since early 2018, when we published our last report.

But there are also worrying signs that the drivers of the industry’s strong capital-markets performance so far this century, when it has been the top performer in its value chain, have played out. If so, the chemical industry faces a new round of challenges to luring investor interest.

Slipping from the top-performer position in its value chain
The global chemical industry is no stranger to setbacks in capital-market performance. It traversed its last bout of setbacks and unsteadiness in 2015–16, in the wake of the 2014 collapse of oil prices. This triggered concerns that a narrower naphtha-gas-liquid price differential might hold down commodity-petrochemical companies’ profitability prospects and was compounded by worries about faltering global economic growth. But the whole industry—not just the petrochemical sector—was able to put this behind it, with the positive drivers for the industry’s performance reasserting themselves. The chemical industry’s performance in total shareholder returns (TSR) rebounded strongly in 2016 and 2017, at a 24 percent compound annual growth rate (CAGR), reaching an absolute peak in January 2018.

Since early 2018, however, the chemical industry’s TSR performance has faltered markedly. The most pronounced deterioration in performance has been at diversified companies, with TSR performance falling by 10 percent CAGR from December 2017 to June 2019. This marks an abrupt change of sentiment on the part of the investment community, which had enthusiastically supported the diversified sector—in particular, several diversified conglomerates that were taking steps to focus their businesses—in the three years leading to the end of 2017.

Commodity chemical companies have also been hurt, down 7 percent CAGR from December 2017 to June 2019. This has been mainly because investors were already pricing in the high margins that petrochemical companies are currently earning (because of a generally snug supply–demand position in many petrochemicals and plastics) while becoming increasingly wary at the prospect of a new wave of capacity being built on the US Gulf Coast, in China, in the Middle East, and even in Western Europe. These plants are due to come onstream in the next two to three years and are likely to depress utilization—and with it, profitability.

Specialties have maintained a positive trend, up 3 percent CAGR, but the growth is much weaker than the 18 percent CAGR the sector had achieved in the 2016–17 period. Additionally, that trend is not strong enough to keep the chemical industry in positive territory: the overall industry is down 3 percent.

> Read the full article on the McKinsey website

By Obi Ezekoye, Chantal Lorbeer, Andjelka Milutinovic, Siddharth Periwal, and Theo Jan Simons

Source: McKinsey

Related News

October 24, 2020

Johnson Matthey completes new plant in China for fuel-cell components

Chemical Value Chain

Johnson Matthey is expanding its fuel cell operations into China with a £7.5-million facility to manufacture critical components for customers in the region.

October 24, 2020

Borealis commissions naphtha-storage cavern in Finland

Chemical Value Chain

Having invested around EUR 25 million in the construction of this 80,000-m3 facility, Borealis can now source and store naphtha for its Porvoo operations from the global market in a more flexible, cost-efficient, and secure way.

October 24, 2020

Mitsubishi Chemical names non-Japanese national as next CEO

Chemical Value Chain

Mitsubishi Chemical Holdings, Japan’s largest chemical maker, has named Jean-Marc Gilson, CEO of plant-ingredients maker Roquette Frères (Lestrem, France), as its next CEO, effective 1 April 2021.

Send this to a friend