* We believe the European Chemicals names are likely to rely upon an
improved 2H to achieve consensus growth forecasts. With demand visibility
low (early signs suggest March exit rates from Q1 are more favourable
following a post Chinese New Year demand improvement), we believe there
is a risk of underwhelming commodity chemicals performance (both spreads
and volumes) throughout the year. CS remains on average -1.5% below
FY16F consensus (and in this note we make minor earnings changes/mark
to market TPs into Q1 results) – with our preference for sector quality
(businesses with pricing power) over the commodity chemicals exposures.
* An underwhelming 1Q, but improving throughout the quarter: 1)
Demand trends throughout January and February were underwhelming.
However, we understand this improved post Chinese New Year (March) as
customer inventory levels were approaching trough levels. Notable end
markets that improved included Automotive and Construction (Europe –
weather related); 2) Cracker outages (noted across Asia and US) has not
significantly benefited petrochemical margins; and 3) Delayed start to the
European Agriculture season – likely to shift CP/fertiliser volumes into 2Q.
* Positioning: We retain our key investment theme of 'buy pricing power / sell
commodities', and reiterate our relative preference for AkzoNobel (O/P, TP
€71) / Arkema (O/P, TP €71) over BASF (U/P, TP €63) / Evonik (U/P, TP
€25.5). Additionally, we continue to forecast a divergence in staples markets
and our relative preference is for Croda (O/P, TP £32) versus Novozymes
(U/P, TP DKK 255).