Stalling economic growth, rising employee costs may trouble chems firms - UBS

26 March 2018 12:41 Source:ICIS News

LONDON (ICIS)--Rising staff costs as a percentage of revenue is a cause for concern for chemical firms at a time when lead economic indicators are starting to stumble, according to analysts at investment bank UBS.

Source: Monkey Business Images/REX/ShutterstockAccording to UBS, employee costs as a percentage of revenue have increased 120bps between 2014 and 2017, a period benefiting from a strong macroeconomic backdrop.

However, with lead macro indicators falling - eurozone private sector growth continued to slow in March from the highs of late 2017, while February inflation fell to 1.1% - UBS expressed concern that wage costs as a percentage of sales are at the highest level for at least four years.

“We could be facing a period of deteriorating economics that risks catching the sector off-guard with an inflated cost base,” UBS said in its note.

The bank said that it is concerned about the lack of cost-efficiency programmes announced by companies in their guides for 2018.

“On our estimates, based on company guidance, specific efficiency programmes (as % of EBITDA) for 2018 are likely to be running at half the level of the last ten years,” it said.

UBS added that, according to estimates for 2018, cost cutting as a percentage of EBITDA is at its lowest level since 2011.

“The highest cost cutting we can see comes from the fertilizer names in the face of a weak grain market backdrop, while specialty names and many consumer chemical names are not engaging in any announced cost cutting measures.”

(Picture source: Monkey Business Images/REX/Shutterstock)

By Niall Swan