By John Richardson
CHEMICAL share prices have surged to the top of what one industry observer calls “buzz mountain” during the last six months.
The buzz has been centred on the supercycle theory which holds that recent corrections in commodity prices are nothing more than a temporary blip.
Formosa Plastics Corp (FPC) and Formosa Chemicals & Fibre Corp (FCFC) have been some of the star performers in Asia since September 2010 with their share prices up by 40-50%, according to a UBS report we received last week.
Another outperformer has been Petronas Chemicals Group (PCG), which, since it first listed last November, had seen its share rise by 27%, added the same report
All three companies’ share prices have slipped over the last few days on increasing global economic concerns, including most prominently for Asia the slowdown in China.
Parsing through chemicals’ analysts reports, the blog can find little evidence of the realism we think is now essential given exceptionally weak fundamentals.
This is not a blip, it is something much worse – and at the very least will keep petrochemical pricing volatile and depressed for the rest of this year.
Broadening this out, a fascinating Associated Press article from yesterday, which we spotted in the LA Times, included the following:
“Among the 9,015 analyst recommendations on S&P 500 stocks, only 300 — or 3.3% — are to sell, according to data provider FactSet. That’s the same proportion as a month ago, when the economy was considered to be in better shape. All else being equal, you want to sell if you think profit growth could slow.”
The article goes on to say that many analysts won’t cut earnings estimates until senior executives warn about weakening sales and profits.
“But many companies appear to be waiting until they announce second-quarter earnings to guide estimates down. That won’t be before mid-July,” continues the Associated Press.
By that time it could be too late for investors who have held on for too long.
There is some evidence of realism in the chemicals industry – for example, Torsten Penkuhn, the head of BASF’s petrochemicals business in Asia’s comments in an ICB interview last month.
Fellow blogger Paul Hodges also wrote in a post last Friday:
“Major commodity trader, Glencore, said this week ‘we see a pullback in China and it will continue’.
Sadly, though, he pointed out that this challenged the view expressed last month by Dow Chemical CEO Andrew Liveris.
Rhodia CEO Jean-Pierre Clamadieu also said earlier this month that he saw “no material signs of a slowdown”.