Though the chemicals sector now appears to be a less cyclical business, it does still depend on two factors: first, the industrial sector, which is a key consumer of chemical products, and second global trade momentum, given the fact that upstream (petro)chemical goods, especially ethylene, are highly traded. In the West, many chemical players have focused on specialties to avoid being too dependent on economic cycles and changes in oil prices. Now, Asian competitors will need to do the same as they remain positioned in the upstream sector where volumes are very high, but prices and margins are not. Moreover, the U.S. shale gas boom has restructured the landscape of the global chemical industry by helping the U.S. chemical sector produce the main commoditized chemical products with gas-derived ethane, which has had a low and stable price for quite a long time, unlike oil. Therefore, this has reduced the cost of producing upstream chemicals such as ethylene and lured huge investments across the Atlantic, unlike in other regions (like Asia and Europe) where manufacturers use oil-derived naphtha as a feedstock to produce petrochemicals at a competitive disadvantage.
With global industrial production down by -9% y/y in Q2 2020 due to strong lockdown measures, chemical output saw a peak-to-trough of near 5% between Q4 2019 and Q2 2020. Because of its role as an inescapable industry in global supply chains, chemical production bounced back as soon as lockdown measures began to be lifted and massive economic stimulus packages started taking effect. The latest data available show that some chemical sub-sectors have held up better than others have during the slump. Specialties such as soaps and detergents are benefiting from strong demand for sanitizers, while highly profitable cosmetics and paints (including coatings) have had to face a decline in household consumption and the closure of some car factories, respectively. Yet the quick resumption of automotive production and the surprising resilience of construction have contributed to the recovery in paints and coatings output, as well as a not that bad performance in plastic materials.
Alongside the easing of global lockdown measures that we saw four months ago, we expected the improvement across the broad chemicals spectrum to keep up until the end of the year. However, this is not the case anymore as a second wave of lockdowns is underway in some Western countries. It is unlikely that the Chinese chemical sector, which has already recovered to pre-crisis levels, could make up for the lagging of other regions in chemicals, even if there is no production halt this time. In a nutshell, we think that global chemicals output is going to drop by -4% in 2020 before bouncing back to +5% next year, regardless of any renewed economic stimulus packages in the most ailing economies.