Chemical companies have been riding high, but the trends that have underpinned that performance are shifting. Companies should reflect carefully on their strengths as they move into this new territory.
Whenever over the past decade we have examined the chemical industry’s capital-markets performance, a very similar picture has emerged. On the basis of total returns to shareholders (TRS), the chemical sector has, over the long term, outperformed not only the overall market but also most of its customer industries and raw-material suppliers.1 Within chemicals, the commodity and specialty subsectors show similar performance, while diversified companies have trailed. There have been variations on the theme over time, with petrochemical players’ performance more affected by the naphtha-ethane spread and the commodity cycle, while specialty players have been more affected by end-market growth and mergers-and-acquisitions activity, but the variations have not changed the overall sunny picture.
The impetus behind this strong performance has been the chemical industry’s ability to significantly increase earnings on a base of total revenues and invested capital that has grown more slowly, at a rate tracking close to global GDP growth. This ability has been underpinned by the following factors.
First, the chemical industry has increased its productivity over time and has distinguished itself by holding onto the resulting profitability gains, unlike many other industries that also raised productivity but simply competed the gains away. How did the chemical sector achieve this? Looked at overall, the sector appears fragmented, but two decades of portfolio restructuring have created a highly concentrated industry structure in many segments. That has put those chemical companies in a strong bargaining position relative to customers and suppliers.
Next, the chemical industry has benefited tremendously from China’s economic growth of the past two decades. China’s capacity could not be built fast enough to meet domestic demand, so chemicals had to be imported. This allowed West European and North American players to grow while their home markets were experiencing near stagnation.
Last, we must keep in mind that the chemical industry has an intrinsically sound business model: its products enable the “world of things.” Without some support from the chemical industry, hardly any of what we touch, of the buildings we live in, the food we eat, and the healthcare we receive could exist. The industry as a whole is therefore positioned to profit from a wide range of trends, from sustainability to e-mobility, from commodity demand surges to major changes in consumer behavior.
Along with these strong fundamentals, there have been a number of positive developments that have benefited specific segments of the industry, and helped the industry’s overall capital-markets performance. The most notable have been the availability of stranded gas in the Middle East and shale gas in North America, and the upward trend in many agricultural-commodity prices from 2000 to 2013.
