Chemicals sector risk report

Surprisingly resilient despite the Covid-19 crisis. Usually considered as a cyclical industry, chemicals still emerged from the Covid-19 crisis relatively unscathed. Global chemical output came to a standstill with +0.2% y/y growth last year but the swift turnaround that started in H2 2020 and proceeded into 2021 points to a recovery expected near +6% y/y for global chemical output, following the significant rebound of +10.3% in H1 2021. This impressive figure stems from both the strong catch-up effect of very low activity levels reached in the beginning of 2020 and from the strong recovery in China in the first quarter of 2020 and that of the Western region afterwards.

A strong world chemical output recovery in H1 2021 in spite of the US lagging behind. On top of positive base effects, these performances have largely been driven by the significant recovery in key-use markets, especially construction, electronics and automotive. While the Asia region posted a +14% y/y growth output rate, China and India’s chemical activity recorded a +16% and + 18% y/y performance, respectively, in H1 2021. The Latin American region was at +9% y/y and the EU-27 was at +7.5% y/y. In contrast, US chemical output posted a poor -1.9% y/y at the end of June 2021 because it first suffered significantly from cold waves in Q1 2021 and then from the consequences of hurricanes over the summer, notably Nicholas but above all Ida, that ground much (petro)chemical infrastructure in the Gulf Coast to a halt.       

Output constraints weighing on H2 2021. Longer lasting supply-chain disruptions have been affecting many industrial sectors that demand chemical products. As a result, the chemical sector has been forced into curbing its ability to meet demand from its customers. These hurdles also resulted from the slowdown in production of its customers penalized by shortages of raw materials such as chips, coal or steel. However, the sector has been able to compensate for these headwinds partially by the good performances of its outlets focused on food (flavors), textiles and household equipment, on top of the pharmaceuticals sector benefiting from the need for medicines against Covid-19. We expect the 2021 yearly performances of the chemical sector to be less bright that that of H1 2021 because of production bottlenecks but also the spread of the Delta variant, notably across emerging markets where vaccination rates are still low. Renewed mobility restrictions in China have started dampening domestic demand and India may see the same shortly if case numbers rise again, as in Russia or in Baltic states.        

Global trade momentum and back-on-track demand from key end-use markets should support chemical output growth of +4% expected in 2022. As the industrial sector is a key consumer of chemical products, global industrial production on the rise will help foster chemical output even if a recent high-frequency survey from JP Morgan has pointed to a slowdown in manufacturing growth mainly due to labor shortages. If the easing in supply-chain disruptions across the automotive sector – a key chemicals consumer – should be gradual, we expect the positive outlook for construction and consumer spending related to cosmetics and soaps and detergents to make up for the gap, provided the spread of the Delta variant around the globe does not bring on renewed mobility restrictions next year. Global trade momentum has also to be taken into account, given that chemical products, especially upstream (basic) chemicals, are highly traded goods.