Europe chemicals stocks slump amid bearish Q1 data, US-China trade fears

LONDON (ICIS)–European chemicals stocks slumped on Friday as investor sentiment soured in the face of bearish first-quarter company financial data and unease over further deterioration in US-China relations.

The week brought fresh negative economic data, with the US PMI index for industry falling to its weakest level since the financial crisis, as well as reports that the US government is considering fresh reprisals against China on allegations that the Xi Jinping’s government had concealed the extent of the danger posed by coronavirus.

Measures said to be under consideration include sanctions, cancelling US debt obligations, or stripping China of sovereign immunity, allowing US governments and private individuals to pursue legal action against the country.

With increased tariff measures still in place between the two countries, the fresh dispute raises the risk of additional impacts on global trade at a time when markets are extremely fragile.

It also raises questions for the pace of China’s rebound from the coronavirus outbreak.

While production is understood to be nearly back to normal after the mass shutdowns earlier in the year, the pace of China’s economic recovery is contingent in part on global demand, likely to continue depressed irrespective of any intensification in hostilities between the two global powers.

The weaker US manufacturing numbers were still substantially above investor expectations despite the extent of the fall, but the underlying data points to a far bleaker picture than the headline numbers suggest, according to analysts at Dutch banking group ING.

“The ISM manufacturing index has dropped to 41.5 in April from 49.1 in March, but this doesn’t tell us the true story.  It is driven entirely by the fact supplier deliveries surged to 76.5,” said ING analyst James Knightley.

“All the important components – production, new orders and employment –collapsed and are consistent with a deeper contraction than during the global financial crisis a little over a decade ago. Production is at an all-time low in a survey that goes back to the 1940s,” he added.

Europe’s Stoxx 600 index of chemicals stocks closed down 3% on Friday, outstripping losses of 2.34% for the FTSE 100 in London, 2.12% for the CAC 40 in Paris, and 2.22% for the DAX in Frankfurt.

The losses in the latter half of the week wiped out the bulk of the mid-week gains seen on the back of brightening investor sentiment as several key global economies moved to ease lockdown measures.

BEARISH Q1
The first-quarter results season kicked into gear this week, with many large chemicals players reporting results and several warning on the impacts still to come.

LyondellBasell said on Friday that its first-quarter net income had fallen 82% and that it has moved to halt production at several polymer plants and reduced operating rates across the board as the supply glut for commodity chemicals seen through much of 2019 intensified as a result of the pandemic.

In Europe, weaker aviation sector demand weighed on Clariant’s first-quarter earnings, while Covestro saw net income fall 89% due to weaker China demand during the period and ongoing polyurethanes weakness.

BASF’s performance in the first quarter was stronger than analysts had projected, but the firm – whose performance is seen to an extent as a bellwether of the sector due to its size – announced this week that it would not make its 2020 targets, adding that markets were so volatile that it would not be issuing fresh guidance.

Operating performance could fall to zero or below in the second quarter if conditions are bad enough, according to CEO Martin Brudermueller.

ExxonMobil also reported the continuing weight of supply overhang on US chemicals operations, but the drop in liquid feedstock prices helped to buoy performance in the region, despite weaker non-US chemicals earnings and the first quarterly group net loss in decades.

“At our annual press conference back at the end of February, unlike many of our DAX peers, we were already warning about the severe consequences of the coronavirus, and we integrated this into our guidance,” said BASF’s CEO on Thursday.

“But even we did not anticipate a global pandemic of this scale. The coronavirus has turned the world upside down.”

Focus article by Tom Brown