The chemical sector has outperformed markets, benefiting from globalization, consolidation, and China's growth while facing new challenges in a protectionist environment.
Fremont, CA: With the capital market performance of the chemical sector over the past decade, a consistent pattern has emerged. The chemical industry has exceeded the overall market's performance and that of most client sectors and raw material providers in terms of total returns to shareholders (TRS). While the performance of commodity and specialty subsectors is similar, diversified companies still have some ground to cover. The overall positive trend remains intact, with specialty firms more sensitive to end-market growth and mergers and acquisitions. Meanwhile, naphtha-ethane spread and the commodity cycle influenced petrochemical companies more.
The chemical industry's capacity to dramatically boost profitability on a base of total sales and invested capital that has expanded more slowly, at a rate that closely tracks global GDP growth, has been the driving force behind this impressive success. The following elements have supported this ability.
First, in contrast to many other industries that have similarly grown productivity but have just competed away the benefits, the chemical industry has differentiated itself by maintaining the profitability gains that have resulted from its gradual growth in productivity. How was this accomplished in the chemical industry? Although the industry seems fragmented when seen as a whole, several areas now have a highly consolidated industrial structure due to two decades of portfolio reorganization. Because of this, those chemical businesses are now in a strong position to negotiate with suppliers and customers.
Second, China's economic expansion over the last 20 years has greatly helped the chemical sector. Chemicals had been imported since China's capacity could not be developed quickly enough to fulfill domestic demand. As a result, although their domestic markets were stagnating, West European and North American players could expand.
Digital advances may accelerate this tendency; a rise in e-commerce fueled by distributors or platforms may further quicken the commoditization of the goods and services offered by specialist businesses. Internet platforms can be as disruptive in some B2C-oriented industries as we witnessed in other consumer arenas, like agrochemicals.
Therefore, the global playing field is leveling again, which may close off yet another development path. Historically, the manufacture of chemicals has tended to be local, occurring in the area where they are consumed. However, the past decade has witnessed a shift from that trend: notable disparities in labor costs, raw material pricing, or simply geographical supply and demand mismatches led to major globalization of the chemical sector and associated development prospects for several participants.
The international chemical business must also acknowledge that it must function in a more patriotic atmosphere, as navigating these changes wasn't enough. The new US government has a similar stance to some emerging-market nations' relatively protectionist trade and investment policies, which may have gotten even more so recently.
