Europe chems stocks rise as investors take comfort on stimulus, despite bleak outlook

Author: Jonathan Lopez


LONDON (ICIS)--Bleak economic conditions did not deter European chemicals stocks and main bourses to post healthy gains on Monday on the back of expectations central banks and governments will unleash further stimulus.

Unprecedented fiscal stimulus deployed by governments around Europe and North America may also soften the blow to economic activity post coronavirus pandemic in terms the health of the private sector in the medium- and long-term, according to financial analysts.

However, crude oil prices continued to slide on Monday as the industry looks at the now: the loss in demand in April and May is expected to hit records.

European stocks took a break from the pessimism instead, following suit from Asian markets where investors got cheerful after the week started with further stimulus in South Korea and Japan, among other countries.

Europe’s Stoxx 600 index for large chemicals companies rose nearly 2%, compared to the previous week’s close, with all but three of its 30 names up; petrochemicals majors BASF and LANXESS posted share price increases of around 4%.

European bourses also rose healthily, from London’s FTSE 100 up 1.64%, Paris’ CAC 40 rising 2.55%, and Frankfurt’s DAX posting an increase of more than 3%.

Looking at the health of the private sector post-pandemic, analysts at Deutsche Bank said that despite the current crisis amounting to the largest in probably a century, defaults in the US and Europe will stand at 11% and 7% of the total.

“[The figures] will be lower than their previous three modern day recessionary peaks and noticeably so in Europe. With all the [monetary, fiscal] intervention out there, authorities are clearly loathed to see companies go to the wall,” said the analysts.

“So 2020-2021 will be a supercharged version of the last 17 years where the default beta to GDP has become lower and lower as explicit intervention and ultra-low yields have made it pretty tough for companies issuing in the capital markets to fall over.”

However, were the global pandemic to last between one and three years, state coffers across the globe would be put under so much pressure that sovereign defaults could take place.

“Especially if central banks can’t intervene for some reason at this point. Then the sky could fall in for many companies,” said the German investment bank.

In Europe’s petrochemicals markets, however, a sign of hard times ahead came from the polyethylene terephthalate (PET) sector, a material widely used in bottles, well known by the general public.

Facilities across Europe would be at their peak in April in normal years, churning out product to supply heavy socialising and tourism.

This year instead, the summer in most of the northern hemisphere is likely to be one without large gatherings; PET as well as most petrochemicals sectors are entering into the unknown.

Even very low prices are not prompting buying as the uncertainty is the only certainty: across Europe, attempts to reopen economies could cause outbreaks, and the potential deep recession puts corporates’ financial health in doubt.

"We are having many discussions with customers who think it is a good time to lock in for 2021, but there are pre-buy concerns about the liquidity of customers," a PET resin buyer said.

"We don't want to get caught with stocks."

Also on Monday, the European Petrochemical Association (EPCA) confirmed the widely expected cancellation of its annual meeting in October.

The event gathers around 2,500 registered delegates and much-larger numbers of non-registered attendees as one-to-one meetings on the sidelines is the main element to the conference.

EPCA however said it would hold a “virtual format” of the annual meeting, which was due to take place in Budapest on 4-7 October.

“Even in the event that the various pandemic lockdown measures were to be lifted, the potential participation of several thousand individuals would create an undue risk to delegates, speakers, staff members and external suppliers as well as to the citizens of Budapest,” said EPCA.

In Germany, the EU's largest economy and manufacturing powerhouse, sentiment in industrial sectors remains at record lows, despite the country starting to appear to have softened the coronavirus blow better than other EU peers.

With an economy heavily focused on exports of goods - manufacturing still accounts for around 20% of GDP - global recessions also affect its industry largely.

On Monday, a much-followed index for manufacturing compiled by Ifo fell to a record minus 50.0 points, already down from March’s minus 19.0 points.

Amid the bleak sentiment, chemicals performed better than expected in April but that is considered just the calm before the storm as lockdowns across the globe filter down to end markets, sharply reducing demand for all chemicals except pharmaceuticals.

Germany’s chemicals industry posted €193bn in sales in 2019, and employs around 450,000 people; it is by far the largest in Europe, where France’s comes second with 218,000 employees and sales below the €100bn/year mark.

“Sentiment among German exporters is in free fall … Many key German industries are particularly affected, such as automotive manufacturing, mechanical engineering, and electrical engineering,” said Ifo’s president Clemens Fuest.

"The decline of export expectations in the chemical industry was comparatively moderate in the previous month, but these companies now expect significant declines in export sales. The only bright spot this month was the pharmaceutical industry, which is expecting stable export business.”