Think Tank: Expect tough competition for downstream chemicals - HSBC

17 March 2014 00:00 Source:ICIS Chemical Business

Pick your markets well is the underlying message from analysts at HSBC who have looked at growth opportunities for emerging market (EM) chemical companies.

The old growth model for those companies: the focus on large-scale upstream capacity building is broken they suggest, particularly given the opportunities of US shale. And Sriharsha Pappu, Geoff Haire, Thomas Hilboldt and Dennis Yoo predict a collision of worlds as developed market (DM) players face increasingly stiff competition in businesses that were once largely their preserve.

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Emerging market players are catching up on downstream chemicals

It is not just that more product chains are becoming open to more competition, rather that an estimated 80% of the growth potential estimated by financial analysts for developed market players in emerging markets is under threat. “We expect the EM chemical companies to gain a position of market relevance within downstream product chains relatively quickly, impacting returns and growth expectations embedded into DM names,” the report’s authors say.

The technological and other barriers to entry into these markets are not necessarily insurmountable, they suggest, particularly given the fire power, in other words, the cash generating capabilities, of some of the newer producers. It has taken more than 25 years to get this far, but the authors suggest that the further shift in the competitive landscape of the global chemical industry could come swiftly.

EM producers will gain access to growth, DM players will lose it. The developed market players might be expecting to capture a great deal more growth in their downstream product portfolios in emerging markets but they will have a fight on their hands. Some products will commoditise faster than others as new players emerge. HSBC thinks the DM companies will become tiered into those with truly differentiated product portfolios and those who run what might be called at best “differentiated commodities”.

The bank likes BASF from its selection of DM players and SABIC from the EM group. BASF’s highly-differentiated and customer–oriented portfolio is a draw, it explains. It believes that the chemicals giant can show the most significant margin recovery in the sector. The potential SABIC has to move downstream is not appreciated by the (financial) markets, it adds. “We believe SABIC remains the best long-term chemical growth story in the Middle East,” it says.

HSBC is also bullish on the ethylene cycle in 2014 with its analysts pointing to expected delays in the addition of new coal to chemicals and cracking capacity and possibly polymer demand growth in China as high as 7% this year, compared with 11% in 2013.

By Nigel Davis