3 things to keep in mind before investing in the chemical sector

You want to diversify your stock portfolio and the chemical sector seems to be a good choice. So you might ask yourself: should I invest in the chemical sector? This is not an easy question to answer but there are 3 thinks to keep in mind before investing in the chemical sector:

  1. Sales in the chemical sector will be double from 2010 to 2030 from € 2,353 billion to € 4,637 billion.
  2. From 1985 to 2030 Asia will increase it’s share in global chemical sales from 15% to 66%. Therefore, Europe’s share in global chemical sales in will decrease from 45% to 15% and NAFTA’s from 30% to 12%.
  3. Ireland and India could increase their exports in 2018 by more than 30%. Lucky you, if you’ve been invested in chemical companies in these countries.

Now let’s see which factors you should keep in mind before investing in the chemical sector… 

Chemical Sector Overview

The chemical industry sector is quite complex, with many products and derivatives. Primarily, chemical products differ by their composition and ingredients. To give you a basic understanding of the different products, the following section describes the main products in the chemical industry.

Agriculture Chemicals

Agrochemicals are chemicals produced for the usage in agriculture. Products are pesticides including insecticides and herbicides for example. Many agrochemicals are toxic, therefore their regulation of usage is very strictly. Keep in mind, before investing in a chemical company that major profit is created with agriculture chemicals, a change in law can have dramatic influence on the finances of the company. For a recent example see Glyphosat from Monsanto.

Basic Chemicals

Organic Chemicals
Organic chemicals contain carbon and are mostly derived from substances such as petroleum, coal, and natural gas. Chemical companies produce with several chemicals new substances that are valuable to other industries. Organic chemicals are ingredients in plastics, synthetic fibers, rubber, adhesives, inks, dyes, explosives, and fertilizers.

Inorganic Chemicals
In contrast to organic chemicals, inorganic chemicals do not contain carbon-carbon bonds. They are relatively low cost chemicals used throughout manufacturing and agriculture. Inorganic chemicals include basic chemicals for industrial processes (i.e., acids, alkalies, salts, oxidizing agents, industrial gases like nitrogen, oxygen, acetylene, nitrous oxide, and halogens), chemical products to be used in manufacturing products (i.e., pigments, dry colors, and alkali metals), and finished products for ultimate consumption (i.e., mineral fertilizers, glass, and construction materials). Most inorganic chemicals are used as building blocks for further production processes, therefore often do not appear in final products.

Petrochemicals & Derivatives (30% volume of basic chemicals)
Chemicals are made from liquefied petroleum gas (LPG), natural gas and crude oil by separating (“cracking”) the large hydrocarbon chains found in fossil fuels. Products are ethylene, propylene, benzene, toluene, xylenes, methanol, vinyl chloride monomer (VCM), styrene, butadiene, and ethylene oxide. Ethylene is the most produced petrochemical and used in the production of plastic, rubber, fibers, detergents, solvents, and anesthetics. Petrochemicals are often the starting materials for polymers and account for a large majority of organic chemicals. Approximately 95% of organic chemicals are produced by petroleum or natural gas. The greatest challenge in the production of ethylene is the high intensity energy use.

Basic chemicals are produced in very large amounts each year, some in millions of tons. Before you invest in the chemical sector, keep in mind, that many emerging countries are now able to produce basic chemicals more cheaply than companies based in the US or Europe. The reason is simple: the production is easy compared to specialty chemicals. The main challenge in the basic chemical sector is to reduce costs while meeting ever more stringent environmental and safety standards.

Specialty Chemicals

Specialty chemicals are for example crop protection, paints and inks, colorants (dyes and pigments). They also include chemicals used by industries as diverse as textiles, paper and engineering.
There has been a tendency in the US and Europe to focus on specialty chemicals, because many emerging countries produce basic chemicals more cheaply. With research and development, specialty chemicals deliver better and more stable profitability. New products are being created to meet both customer needs and new environmental regulations. Note that research and development costs are only covered by new products after years.

Main challenges and trends in the chemical industry sector

Before investing in the chemical sector you have to consider the main challenges and trends for this industry. The last few years merger and acquisition (M&A) was a mayor growth strategy. Examples are:

  • Linde, Praxair
  • Dow, DuPont
  • Syngenta, ChemChina
  • Monsanto, Bayer

The following table shows the total M&A activities for the chemical sector by target market from 2010 to 2016. In 2016 more than 30% of all M&A activities took place in the United States. In 2016 compared to 2010 the most M&A activities took place in Brazil (+100%) and India (+65%).

Total number of M&A transactions per year and country

United States (US)165197204160206186201
United Kingdom (UK)35293727353341

The chemical sector 2010 compared to 1985

In 1985, the global chemical market was divided among many companies. Bayer and BASF had the largest market share, both 2.8%. In 1985 and by market share, 7 out of 10 chemical companies were based in Europe and 3 in NAFTA.

In 2010, BASF had the largest market share of 2% globally. The US companies Dow Chemical and ExxonMobile have been able to maintain or increase their respective market shares compared to 1985, making them both ranked 2nd and 3rd. This suggests that, in comparison to 1985, the chemical industry has been continuing to fragment. Thus, large companies could not maintain their market shares. In 2010, companies from Asia will also be represented amongst the top Chemical companies for the first time. Saudi Arabian company SABIC ranks fourth with 1.5% market share and Chinese company Sinopec ranks fifth with 1.4% market share globally.
Sales increased sharply between 1985 and 2010. The largest companies increased their sales by more than 400%.

In the Chemicals Trend 2018-19 analysis from strategy&, the experts forecast that the next wave of merger and acquisitions will be mid sized companies buying non-core assets of the companies merged in the last few years. From 2016 to 2017, the size of deals in the chemical industry fell by 66% and the average acquisition price tag was just US$136 million, 53% below the three-year average of $292 million.

Major opportunities for the future of chemical companies is the digitization of products and services. Companies have to focus on R&D to develop breakthroughs in nanomaterials. With this development, customer needs like pollution reduction, disease treatment, computer sensors, wearable clothing, robotics, and new forms of packaging can be satisfied.

Also, strategic international partnerships will be important in the future due to the challenge of deglobalization. Around the world, trade protectionism is rising, driven by political movements. Therefore partnerships with regional companies is a critical element of chemical companies’ growth strategies.

Global chemical exports

Change from 2014 to 2015Change from 2015 to 2016Change from 2016 to 2017Change from 2017 to 2018
United States of America-7.06-11.457.618.15
Korea. Republic of-22.38-1.5626.0814.14
Saudi Arabia-28.22-27.8423.77
United Kingdom35.33-33.41-0.9633.73

Before investing into the chemical sector, you should look at basic market dynamics. First, let’s start with chemical exports.

In 2015, global exports drastically decreased. Worldwide, exports fell by 13.61%. The decrease in exports was particularly strong in Saudi Arabia (-28.22%), South Korea (-22.38%), Japan (-21.48%) and the Netherlands (-21.09%). Only Great Britain was able to increase its exports by 35.33%.
In the following year, exports in Great Britain suffered the most (-33.41%), so that the increase in exports in 2015 can be seen as a one-off effect. Exports in Saudi Arabia fell by a further 27.84% in 2016. Ireland and Switzerland were able to increase their exports.
In 2017, overall exports increased again by 9.73%. The strongest export growth had the following countries:

  • South Korea: + 26.08%
  • Saudi Arabia: + 23.77%
  • India: + 21.55%
  • China: + 19.23%

Only a few other countries had to accept an export decline in 2017, like Ireland with -13.12%.
For 2018, the data is not yet available in its entirety. However, as in the previous years, the trend is positive, with the result that all countries have seen an increase in chemical exports. For example, in 2018 Ireland has increased exports by 37.59%, making up for a decline in 2017. Similarly, The United Kingdom and India increased their exports by more than 30% in 2018.

Over the past four years, two countries have been particularly noticeable in their exports: both China and India have been able to increase their exports from year to year. The major reason for the increasing sales in china is that key end markets for chemical companies such as automotive, construction and pulp production are all increasing their operations in Asia. This drives local demand for chemicals.

Share of global chemical exports, by country

China is and remains the country with the largest share of chemical exports worldwide. China increased its share from 10.87% in 2014 to 13.24% in 2017. The second strongest export nation in the chemical industry is the USA. From 2014 to 2017, the US share of global export remained flat, after having increased by about 0.7% from 2014-15. With 6.9% in 2017, Germany ranks third amongst the largest chemical exporting nations.  However, it lost 1.13% of global chemical exports between 2014 and 2017.

Target countries for global exports

CountryTop 1 country to exportTop 1 percentage of exportTop 2 country to exportTop 2 percentage of exportTop 3 country to exportTop 3 percentage of exportTop 4 country to exportTop 4 percentage of exportTop 5 country to exportTop 5 percentage of export
ChinaUnited States12.18India8.52South Korea7.41Japan6.48Other Asia3.64
United States of AmericaCanada13.97Mexico10.01China6.98Japan6.37Belgium5.69
GermanyUnited States11.90Netherlands9.18Switzerland7.10France6.85United Kingdom5.99
BelgiumGermany19.02France10.31United States10.18Italy7.58United Kingdom7.41
IrelandUnited States30.19Belgium18.21Switzerland8.69Germany7.47United Kingdom6.95
South KoreaChina44.88Japan6.25United States6.17Other Asia5.81Hong Kong3.56
SwitzerlandUnited States20.01Germany15.22Italy5.85United Kingdom5.47China4.87
JapanChina25.82South Korea15.64United States13.12Other Asia11.75Hong Kong3.72
NetherlandsGermany21.26Belgium11.59France9.07United Kingdom8.56Italy4.84
SingaporeChina15.05Belgium9.94Indonesia7.44United States6.69South Korea6.50
IndiaUnited States20.04China6.09Brazil3.09Germany2.94United Arab Emirates2.80
FranceGermany11.55United States8.62Belgium7.38Italy7.37United Kingdom6.61
Saudi ArabiaChina22.50India11.00United Arab Emirates6.66Belgium4.59United States4.20
United KingdomUnited States21.47Germany14.10Netherlands8.55France5.39Ireland4.89

The table above shows the top 5 destination countries for exports of the respective countries. This table can be used to find out whether individual, exporting countries are more or less dependent on one country as the respective importer.
It becomes obvious that China, the USA and Germany are the biggest importer for most countries. Only for the US itself Canada is the biggest buyer of chemical exports (13.97%). Remarkable is the strong dependence of South Korea on China. Almost half (44.88%) of the total chemical production of South Korea is exported to China.

For the trade of chemical products proper infrastructure is needed. That’s why a high proportion of European countries also has European trade partners.  They export to neighboring countries in order to save on transport costs or to use existing infrastructure for production such as pipelines for gases or liquids.

Global chemical imports

Change from 2014 to 2015Change from 2015 to 2016Change from 2016 to 2017Change from 2017 to 2018
United States of America-5.52-5.56-6.4518.10
Korea. Republic of-11.76-8.4222.3317.63
United Kingdom-5.74-18.609.9121.11

After knowing about global chemical exports, let’s look at imports. Again, they are an important factor when deciding if you should invest in the chemical industry. Both, exports and imports tell you something about a countries and its companies’ (in-)dependence from global trade.

Not only exports slumped in the chemical sector in 2015. Global imports also fell by 12.59%. Imports in Switzerland (-23.49%) and China (-18.42%) fell particularly sharply. In 2016, imports fell most steeply in the Netherlands (-29.05%) and the United Kingdom (-18.60%). In Japan and especially in Switzerland, imports increased already from 2015 to 2016.

The situation is similar to that of exports, as almost all countries increased their exports in the chemical sector in 2017. Of course, there is a correlation of almost 1 between exports and imports. China in particular increased imports by 25.21% in 2017, followed by South Korea with 22.34%.

By contrast, imports in Switzerland fell by 10.95% in 2017. The data for 2018 is not yet complete for imports. Overall, however, it shows a similar trend as for exports, namely increasing imports. In 2018, Germany’s imports increased particularly strongly with 31.73%. Imports in France fell by 1% in the chemical sector from 2017 to 2018. So far, it’s the only country of our comparison list that experienced decreasing imports.

Share of global chemical imports, by country

In absolute terms, the three largest exporters are also the three largest importers for the chemicals sector. With 12.41%, China had the largest share of global chemical imports in 2017. On year before, the US was still the largest importer with 12.76%, but its imports fell to 10.78% in 2017. Over the years 2014 to 2017, Germany has continued to increase imports, from 7.16% of world chemical imports in 2014 to 7.77% in 2017.

Target countries for global imports

CountryTop 1 country of importTop 1 percentage of importTop 2 country of importTop 2 percentage of importTop 3 country of importTop 3 percentage of importTop 4 country of importTop 4 percentage of importTop 5 country of importTop 5 percentage of import
ChinaSouth Korea15.13Japan13.25United States11.44Germany9.66Other Asia6.79
United States of AmericaIreland17.31Germany9.81Canada8.58Switzerland8.25China7.88
GermanyNetherlands13.74Switzerland13.17United States10.98Belgium7.64France7.14
BelgiumIreland18.23United States14.82Netherlands11.46Germany10.62France8.30
IndiaChina27.10United States8.70Saudi Arabia6.47Germany4.76Singapore4.46
FranceGermany17.62United States11.80Belgium8.68Netherlands6.92Switzerland6.91
JapanUnited States20.75China14.51Germany10.90Switzerland5.90France5.81
ItalyGermany17.21Belgium12.61France11.62United States9.36Switzerland9.06
South KoreaChina21.90Japan21.53United States16.02Germany7.37France2.99
NetherlandsGermany24.64Belgium15.55United States11.93United Kingdom7.60France5.84
SwitzerlandGermany26.28Ireland15.51United States10.70Italy8.92Austria5.25
SpainGermany16.14France11.22United States10.01Belgium6.84Italy6.53
United KingdomNetherlands18.20Germany17.03Belgium9.80France8.39Ireland8.34

China, as the largest importer in the chemicals sector, purchases 15.13% of its imports from South Korea, 13.25% from Japan, 11.44% from the US and 9.66% from Germany. It is striking that the USA, as the second largest importer, purchases goods mainly from Ireland.

As imports in Germany and India have risen sharply in recent years, the focus in the following is placed on these two countries. 13.74% of German imports come from the Netherlands, 13.17% from Switzerland, and 10.98% from the USA. The imports from India are from the following countries: China (27.10%), USA (8.70%) and Saudi Arabia (6.47%).

From these results it can be concluded that companies from the Netherlands, Switzerland, the USA and China have the potential to increase their sales in the upcoming years on a continuous basis.

Is there any more important information for your decision about investing into the chemical sector or not? Let’s see…

Global chemical trade balance

Finally, let’s look at the trade balance of the countries with the highest exports in the chemicals sector.

  • China has managed to net export in the following years.
  • The US, India and France will import 30% to 50% more chemicals in 2018 than those countries export.
  • By contrast, Ireland and Saudi Arabia export more than 70% more than imports.
  • Between 2014 and 2018, Germany has developed from a net exporter to a net importer with a ratio of exports to imports of more than 50%.

Final Thoughts on 3 things to keep in mind before investing in the chemical sector

There you go: I have told you about the major characteristics of the chemical sector. Now you know about the industry’s main products and applications. Further, you now know about global chemical exports and imports. This information is key to select suitable chemical companies to invest in.

Again, keep the following 3 points in mind:

  1. Sales in the chemical sector will be double from 2010 to 2030 from € 2,353 billion to € 4,637 billion.
  2. From 1985 to 2030 Asia will increase it’s share in global chemical sales from 15% to 66%. Therefore, Europe’s share in global chemical sales in will decrease from 45% to 15% and NAFTA’s from 30% to 12%.
  3. Ireland and India could increase their exports in 2018 by more than 30%. Lucky you, if you’ve been invested in chemical companies in these countries.

Now I would like to hear from you..

Which stock of the chemical sector are you going to analyze or buy first? Do you think you will find some good investment opportunities?

Either way, let me know by leaving a comment below right now.

Thanks for reading this article. Please, let us know if you have feedback, corrections, or any further question (either down below in the comments or via contact). We are happy to discuss and further support you along your way to becoming a “yield reviewer”.

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