chemical companies will be dancing to a very different tune

Chemical companies have been doing well, but the trend supporting this performance is changing. When entering this new field, enterprises should carefully reflect on their own advantages.

In the past decade, when we look at the capital market performance of the chemical industry, there has been a very similar situation. Based on total shareholder return (TRS), in the long run, the chemical industry outperformed not only the overall market, but also most customer industries and raw material suppliers. In the chemical sector, commodity and specialty segments performed similarly, while diversified companies lagged behind. Over time, people have different views on this topic. Petrochemical companies’ performance is more affected by naphtha ethane diffusion and commodity cycle, while chemical companies are more affected by terminal market growth and M & A activities. However, these changes have not changed the overall bright prospects.

The driving force behind this strong performance is the ability of the chemical industry to substantially increase its earnings on the basis of slower growth in total income and investment capital, which is close to the growth rate of global GDP. This capability is supported by the following factors.

First of all, over time, chemical companies have increased productivity and stood out by maintaining the resulting profitability. Unlike many other industries, they have also increased productivity, but only consumed the revenue through competition. How does the chemical sector achieve this? On the whole, the industry seems to be decentralized, but 20 years of portfolio restructuring has formed a highly concentrated industry structure in many areas. This makes these chemical enterprises in a strong position in bargaining with customers and suppliers.

Second, the chemical industry has benefited a lot from China’s economic growth over the past 20 years. China’s capacity building is not fast enough to meet domestic demand, so chemicals have to be imported. This has allowed the Western European and North American markets to grow at a near standstill in their home markets.

Finally, we must remember that the chemical industry has an inherently sound business model: its products make the “world of things” possible. “Without the support of the chemical industry, the things we come into contact with, the buildings we live in, the food we eat and the health care we get will hardly exist. As a result, from sustainability to electronic mobility, from the surge in demand for goods to major changes in consumer behavior, the industry as a whole will benefit from trends.

In addition to these strong fundamentals, there have been some positive developments that benefit specific sectors of the industry and help the industry’s overall performance in the capital market. Most notable are idle natural gas in the Middle East and shale gas in North America, as well as the upward trend in the prices of many agricultural products from 2000 to 2013.