17 January 2013 19:50 [Source: ICB]
Pointers for investors in European chemicals stocks published by the London office of Bernstein Research will chime with industry executives.
Chemicals outperformed most other sectors in Europe last year. The Dow Jones STOXX Europe 600 Chemicals index rose by 29.5% compared with an increase for the broad STOXX 600 index of 14.4%. Only Europe's automobiles and auto parts companies and its insurance sector performed better. Market sentiment for companies in the index mirrors some important fundamentals.
The chemicals sector is seen as relatively robust in a weak global economic environment
Yet economic, industrial and financial market uncertainty in some respects played into the hands of chemical companies. Europe's chemical players have sought for years to manage cyclicality better and to move into more stable products. And they have pushed hard to gain inroads into fast-growing markets.
Some companies clearly are better placed than others to buck the general trend. But the chemicals sector is seen as relatively robust in a weak global economic environment.
Sector firms are facing more, not less feedstock cost price volatility, particularly as producers in North America shift away from naphtha to take advantage of lower priced ethane. That shift will help define winners and losers in petrochemicals but also help drive creativity downstream among intermediates processors, which will have to manage raw material price volatility even better.
Bernstein Research puts it thus: "Steep cost curves give some low-cost producers 'protected' pricing power, which leads to a base of earnings that is more stable than expected and potentially higher valuation multiples." It thinks Dow Chemical and LyondellBasell in ethylene and Yara and CF Industries in ammonia/urea "will continue to benefit from the shape of their industries' costs curves.
"The ongoing shift away from naphtha cracking will cause more petrochemical price volatility (ie, the input costs for many) and lead to periodic quarterly profit warnings if customers fail to manage the inflation. This applies to nearly all European chemicals companies. The highly integrated BASF would be most insulated."
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