11 July 2012 15:12 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS)--Newly introduced indicators should show how important the chemical industry can be as a barometer of different types of economic activity. The more basic chemicals and plastics are highly sensitive to GDP. Certain chemical prices swing quickly with the price of oil. The output, price and profitability of a broad range of products are closely linked to industrial production.
Chemical company share or stock prices reflect industrial and economic trends and they also mirror financial market volatility. And at a time of such market (financial and physical) insecurity, indices derived from them provide fascinating insights into chemicals sector and sub-sector performance.
The 33 sub-sector chemical share price indices produced by the Valence Group and launched in June are showing how closely tied some parts of this industry are to GDP, as might be expected. But the difference in performance across sub-sectors is vast, says the investment bank.
“This reinforces the view that the chemical industry needs to be treated on a more granular level than the crude ‘specialty and commodity’ split used heretofore,” it adds.
Distinguishing between commodities and specialties still only provides a very broad view of a particularly diverse industrial sector. That may be fine for some investors, but there are others who are seeking a more detailed analysis and industry participants who want to benchmark the performance of their own firm against a much more focused chemicals sub-sector trend.
“It is better to have something that is directly related to that sub-sector,” says Peter Hall, who is one of Valence Group’s founding partners. “Much more granular is much more useful.”
One of the reasons why the bank wanted to drill down in chemicals was to give it a better tool to use in conversations with chemical company CEO’s on M&A (merger and acquisition) opportunities.
“You see these big differences [across the sector],” Hall says. He adds that the movement of some of the sub-sector indices is counter-intuitive - and they don’t travel in the same way.
The Basic Chemicals and Commodity Polymers Index is highly sensitive to GDP, the Valence Group says. The index almost doubled in 2010 as prices and volumes rose and the performance of companies in the sub-sector improved. Economic uncertainty and inventory de-stocking later in 2012 were reflected in the index as have been economic movements in 2012.
“Although a link to GDP is unsurprising, the sensitivity of stock performance is quite dramatic and unexpected,” the Valence Group adds. “These companies, which are mostly linked to olefins and polyolefins, are some of the first to be impacted by any sign of changes in economic activity and investors react to these signals accordingly.”
As the chart shows, however, the chloralkali sub-index has underperformed the group’s over-arching chemicals index. This might reflect the closer link between polyvinyl chloride (PVC) and the construction industry and sector overcapacity in some regions, it suggests
One can speculate on where the Composites index might go in the medium term given expected government spending on wind energy and the growth in the aerospace and electronics industries. Currently, it is well below its 2007 peak and overall performance is 40% down on five-year highs, the Valence Group says.
M&A activity, whether expected or real, also drives the indices and this is has been apparent in the Water Chemicals and Services sub-sector.
“Coatings has benefited from a slowly thawing housing sector,” the Valence Group says. “Adhesives and sealants similarly has benefited from an improving housing sector and improved competitive dynamics.”
Of some surprise is what Valence calls the “remarkably different performance” of the Diversified Performance Products and Large Diversified indices, even though these contain some of the larger chemical companies.
The share prices of the larger diversified players in chemicals tend to track global financial markets and respond to the global economic outlook. But the different indices clearly reflect different chemical sub-sector dynamics.
For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.
Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.
|ICIS news FREE TRIAL|
|Get access to breaking chemical news as it happens.|
|ICIS Global Petrochemical Index (IPEX)|
|ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index|
Asian Chemical Connections