Signs of recovery for Europe chemicals industry on the horizon but near-term conditions remain weak

Author: Morgan Condon

2020/06/26

LONDON (ICIS)--Any recovery for the European chemicals sector is likely to be delayed until September, according to analysts from Baader Bank on Friday.

Business sentiment has picked up, and the prospect of a recovery could come to fruition in 2020-2021, but near-term circumstances remain bleak for the sector.

As buyers sit on full inventories, there is no need to restock material, which means markets could be quiet over the coming weeks.

The pandemic has capped the feasibility of longer-reaching forecasts, with many companies uncertain of how economic conditions will unfold beyond July.

This could delay a pick-up in activity until after the summer break, meaning any chance of taking profits may be pushed nearer the end of the third quarter.

Pricing power is expected to weaken in the second half of 2020, with Baader Bank anticipating low single-digit to mid-single digit declines.

Despite the environment in the second quarter becoming worse than initial expectations, the chance of things improving somewhat could lead the stock markets to focus more on the rest of the coming months and year.

As lockdown measures have eased in the latter part of the second quarter, this has given a boost to cyclical stocks, like chemicals, which have marked a 14% increase since the beginning of April 2020.

This optimism has not been held up for all European producers, with Baader Bank advising a “cautious view” on Solvay earlier in the week as the Belgium based company risks a €1.5bn impairment charge.

Financial services company Moody’s downgraded German major BASF’s credit rating as production of upstream chemicals risks exposure to cyclical downturns linked to crude price volatility.

Lockdown has sustained demand in other areas of the chemicals sector, as analysts at Credit Suisse upgraded AkzoNobel’s value to “outperform”, deeming the paints producer its “top pick within European chemicals”.

AkzoNobel has benefitted from increased demand for paints from consumers who are spending more time at home, coupled with the lower costs of raw materials.

Further signs of encouragement can be noted from employment levels in Germany, as the ifo employment barometer for Germany increased across all sectors.

There have still been job cuts in the industrial segment, although the rate of contraction has slowed on the previous month, but activity in the chemicals-intensive construction sector could support demand for some materials.

(Thumbnail picture: A Solvay plant in Antwerp, Belgium)

Focus article by Morgan Condon

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