Chemicals outlook brighter as industry assesses pandemic customer impact

Now is the time in most chemicals markets to be more optimistic while starting to better understand the implications of the deep slump in national and regional economies.

by Nigel Davis, Insight’s Editor, ICIS

Chemicals demand was buoyed to some extent through the coronavirus lockdowns by customers buying while they could – a degree of panic buying perhaps.

The slump in the oil price and the subsequent drop in prices of some of the major petrochemicals could have helped more stock build in the supply chain.

The available data show that EU chemical output in the first quarter was down only 0.7% year on year while other sectors in the manufacturing economy slumped – the most significant manufacturing downturn being in automobiles.

Chemicals capacity utilisation fell much more steeply, while the balance of business sentiment, hardly surprisingly, dropped into negative territory and continued to do so as the second quarter progressed.

Focused on the shape of the recovery

Industry economists have noted, however, that business expectations improved somewhat running into May. The climate for the chemicals sector in the EU is very much in line with that of manufacturing more broadly: close to the depths seen in the 2008/09 financial crisis, and levels of uncertainty are significant.

Nevertheless, the data are showing that chemicals is still less affected than other EU manufacturing sectors. The charts shown here are from trade federation Cefic’s analysis of EU statistics agency, Eurostat, data.

Minds are very much focused now on the shape of the recovery as businesses across previously locked down economies get back to work. The spectacular demand in some product chains related to healthcare and protection is likely to be sustained in the near term as protection measures become almost institutionalised in different ways of working.

For the chemical industry the future growth patterns for plastics, other materials and chemicals in end-use sectors like automotive and construction will be vitally important as drivers of demand growth and trade. Second-quarter reports from the major players should shed more light on the journey through the depth of the downturn in April and the pace of recovery through May and June.

Johnson Matthey’s results

Financial results from UK headquartered catalysts and chemicals maker Johnson Matthey last week opened another window onto the impact of the crisis on recent performance and near-term expectations. The company’s latest fiscal year ended on 31 March. The company makes catalysts and chemicals. It has traded platinum group metals for more than 150 years.

Tied so closely to the automotive industry, its ‘Clean Air’ catalysts segment suffered as OEMs shutdown in the face of the pandemic. COVID-19 adversely impacted full year operating profit by £60m ($75m) with £30m of the hit coming from lower demand in Clean Air. Fiscal full year 2020 underlying operating profit for the company (profit excluding restructuring and impairment charges) was down 6% at £539m.

Johnson Matthey said that Clean Air customers were gradually reopening their plants but that “visibility on the path to recovery” remained low. Current external data suggested an approximate 25% decline in light duty vehicle production in Europe and the US.

It’s ‘Efficent Natural Resources’ segment businesses are diverse, including chemicals, catalysts, and process technology sub groups, alongside refinery and gasification catalysts, precious metal and glass technology products. These are later cycle than Clean Air in respect of the hit from the COVID-19 lockdowns, so the impact of lower demand is expected to come through later.

Stronger performance of chemicals

The table below is from Germany’s chemicals trade group the VCI and its ‘Business Worldwide’ report recently issued. It highlights the relatively stronger performance of chemicals in the first quarter year on year relative to other EU industrial sectors and the continued growth of pharmaceuticals and food and drink through the pandemic hit quarter.