What do chemical investors care about?
* In this report we investigate in some detail the key issues raised by investors. These are mainly focused
on the prospects for growth in 2015, both organic and via acquisitions, the impact of alternative
production technologies and capacity growth, as well as the impact of the falling oil price, leading to the
risk of destocking.
Growth is slowing
With little acceleration in global GDP growth in 2015, coupled with geopolitical tensions, we expect
underlying chemical output to average around 2-3% in 2015. This will be higher for those companies
exposed to developing Asian economies or those adding capacity.
Falling oil price = destocking?
One of the biggest surprises of the summer has been the sharp collapse in the oil price. For the chemical
industry, the falling oil price should lead to destocking as customers run down inventories. We show that
inventories through the chemical chain are relatively low compared to history and that current chemical
prices are in line with the oil price given the historic relationship. In our view, when a destocking period
comes, it may not be as severe as in Q4 2011.
Does alternative production technology really pose a risk?
The threat of oversupply is something the chemical sector has been living with for the last two years.
In petrochemicals we are seeing more focus on alternative technologies such as coal-to-chemicals,
propane dehydrogenation, on-purpose butadiene as well as naphtha crackers using more ethane feedstock.
The chemical feedstock slate has become more complex over the last six years and in this report we look
at some of the key issues around feedstocks and alternative technologies to understand the potential
impact on all chemical producers.
Turning on a sixpence
As we have seen with the sector in past, the outlook can change very quickly. To become more
constructive we would need to see a pick-up in global growth, a recovery in the oil price, the phasing of
supply to be pushed further out or the alternative technologies to have ramping-up or yield problems.
In this scenario, unit costs would fall, boosting margins across the chemical industry.
Where to invest?
With limited visibility over the demand outlook for the next 12-18 months, we believe investors should
look for those companies that continue to see growth either through exposure to end-markets or capacity