OUTLOOK ’15: Modest growth, volatility for European chemicals players
Tom Brown
06-Jan-2015
By Tom Brown
LONDON (ICIS)–Doing business in Europe over the last
few years for many markets has been an exercise in searching
for the bottom, with the followers of the worst-hit sectors
such as the automotive rubber sector pronouncing that demand
had hit the floor several times over the course of 2012 and
2013, only to see end markets such as the automotive sector
slide further on the back of the eurozone’s faltering limp
out of recession.
2014 saw a slight thawing of the market environment in
Europe, but the region’s recovery remains as grinding and
protracted as ever.
Purchasing managers’ index (PMI) data for eurozone bulwarks
such as Germany and France has slid into
contraction on multiple occasions over the course of year,
despite the European Central Bank moving further into
uncharted policy waters with its move to
purchase asset-backed securities.
The eurozone is expected to continue to grow in 2015, but at
rates that are unlikely to threaten the prevailing idea that
Europe may be facing a decade of economic stagnation,
according to estimates from the IMF and OECD.
This sluggishness is likely to be mirrored by the chemicals
industry, with Cefic cutting its 2015 growth
forecast from 1.5% to 1% in its latest sector
outlook, released in early December, on data indicating
continued anaemic economic condition.
The forecast is echoed by HSBC, which forecasts such
lethargic volume growth for chemicals in Europe that without
cost-cutting measures – which has been the watchword for many
companies for several years now – margin expansion is likely
to be next to nonexistent.
“We expect the environment to remain tough with
volumes expanding by a mere 2-3% in the mid-term.
Given ongoing fixed cost inflation and commoditisation,
this means that in the absence of cost efficiency
programmes, underlying margin expansion will be
virtually non-existent,” the banking group said in its
December chemicals industry report.
Despite the lack of scope for margin recovery for many
producers, the bank is still predicting an average
year-on-year growth in earnings before interest, tax,
depreciation and amortisation (EBITDA) of 8%, based less on
improving market conditions and more on the easing of some
additional competitive headwinds.
“Three quarters of [predicted EBITDA growth] is coming from
currency tailwinds, acquisitions and cost cutting,” HSBC
said, cautioning that “we do not expect earnings momentum to
return to the [chemicals] sector yet, which will make it
difficult to outperform given the high multiples the sector
is trading on.”
While the effects of the sharp drop in oil prices over the
last few months are still rippling through the market, the
weakening of the euro against other major currencies has
reduced the impact of exchange effects on European
producers.
BASF noted a 7.7% increase in EBITDA in its
third-quarter earnings and a 3.3% increase in revenues,
despite an overall fall in net profit on the back of a higher
tax bill, while AkzoNobel posted a 32% year-on-year increase in
third-quarter net profit on the back of lower costs, despite
slightly reduced sales.
However, numerous companies noted
prevailing challenges, placing and
full-year earnings forecasts in the lower end of projected
ranges, despite the low expectations those initial
predictions may have been made on
“Structural challenges in the
emerging markets and the uncertainty stemming from ongoing
political disputes and military conflicts are increasingly
holding back growth expectations,” noted Evonik in late October.
The need to examine efficiencies
and focus on strengths as a means of driving growth in a
static market means that divestments driven by the casting
off of non-core operations is likely to continue to be a
driver of mergers and acquisitions activity in the sector for
another year.
The continuing shift away from commodity chemicals toward
higher-margin specialties is also like to be a factor in
European chemical company divestments next year, according to
Anton Ticktin, a partner at chemicals industry M&A
advisory firm Valence Group.
“If you look at most European companies, they’ve
actually moved out of large parts of the demand chain anyway.
Look at Solvay, they’ll be exiting quite a few businesses
soon, if they haven’t done so already,” Ticktin said.
“The businesses being sold are more on the commodity side,
either related to energy costs or feedstocks… I think
European companies will continue divesting upstream assets in
favour of the downstream, and I think we’re going to continue
that cycle over the next few years,” he added.
The impact of falling oil prices, and how long they will stay
low, is difficult to predict at present. HSBC predicts the
price fall will have little overall impact on the
competitiveness of European chemicals producers, while the
IEA predicts that the effect will be a more pronounced
negative for producing countries than it will be a positive
for importing countries.
Oil producers are expected to eventually tighten supply by
reducing investment in exploration, but the IEA noted that
fully-funded projects are likely to go forward, meaning that
tightened supply on reduced investment is likely to be more
deeply-felt in the medium to long-term.
However, for the time being reduced energy costs may serve to
level the playing field to an extent between European and
North American producers, Ticktin added.
“I think Europe has a big advantage because they’re no longer
disadvantaged in the same way in terms of energy costs,” he
noted.
Moody’s is predicting that European companies will continue
to underperform North American firms at the lower end of the
5-7% average growth rate the ratings agency predicts for the
industry in 2015, but a $40/bbl drop in the oil price serves
to mitigate the extent of the competitive difference between
the regions as price falls gradually get passed down by
energy companies.
“It’s interesting when you look now at share prices, the
prices of some [US] companies like LyondellBasell and
Westlake have collapsed comparatively speaking, simply
because the gas-oil price difference has basically
disappeared, so their massive advantage has just gone now,”
he added.
While Europe is unlikely to be able to compete on ethylene
and derivative products, the move towards specialties in face
of the US’ ramp-up of polyethylene capacity may pay dividends
down the line, with falling prices and an anticipated wave of
additional ethylene (C2).
“I think obviously in terms of C2 chemicals, Europe remains
at a disadvantage against the Middle East and the US, I think
that’s an area in which will Europe will be a very small area
in the future,” he said.
“For C3, C4 and aromatics,
that whole commodity polymer chain, I think Europe will still
hold its own, so I think there will still be some
opportunities there for European companies, and I think that
downstream they’re pretty well-positioned. I think going
forward, it’s interesting what would happen in five years’
time, who is going to be the winner of what’s happening in
shale gas,” he added.
Analysts have not removed another eurozone economic collapse
from their bear cases for 2015, and the impact of sanctions
and cheap oil on Russia’s stability has implications for the
whole continent.
But assuming, as most analysts have, that the recovery will
broadly continue its lumbering path upwards, then zero growth
does not mean no growth.
Some of the key headwinds that have dogged results have faded
and that, along with lower oil prices may add a slight
fillip to European company competitiveness, meaning that 2015
could stand to be a modest improvement on the year that
preceded it. That is probably the best producers could hope
for from the current regional environment.
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