The tide is turning for chemical companies
Chemical companies have been going well, but the trend supporting their performance is changing. When entering this new field, chemical companies should carefully consider their own strength.
In the past decade, whenever we study the capital market performance of the chemical industry, a very similar picture will appear. According to the total shareholder return (TRS), in the long run, the performance of the chemical industry is not only better than that of the overall market, but also better than that of most customer industries and raw material suppliers. Among the chemical stocks, commodity and special products stocks performed similarly, while diversified companies lagged behind. Over time, this theme has changed. The performance of petrochemical companies is more affected by naphthalene ethane diffusion and commodity cycle, while professional enterprises are more affected by terminal market growth and M & A activities. However, these changes have not changed the overall optimistic situation.
The driving force behind this strong performance is that the chemical industry has been able to significantly increase its income on the basis of the slow growth of total income and investment capital, which is close to the growth of global GDP. This ability is supported by the following factors.
First of all, over time, the chemical industry has increased productivity and made itself stand out by retaining the resulting profitability. Unlike many other industries, they have also increased productivity but only lost profits in competition. How does the chemical industry achieve this? On the whole, the industry seems to be decentralized, but the 20-year portfolio restructuring has created a highly concentrated industry structure in many areas. This gives these chemical companies a strong position in negotiations 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 it has to import chemicals. This allows players in Western Europe and North America to grow when their home markets are almost stagnant.
Finally, we must remember that the chemical industry has an inherently sound business model: its products make "the world of things" possible. "Without some support from the chemical industry, almost nothing we touch, the buildings we live in, the food we eat and the health care we get would exist. As a result, the industry as a whole will benefit from trends ranging from sustainability to electric travel, from surging demand for commodities to major changes in consumer behavior.
In addition to these strong fundamentals, there are some positive developments that benefit specific sectors of the industry and help the industry's overall capital market performance. What is most striking is the availability of retained 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.