In the past year, the concerns of the management of many chemical companies have increased significantly. It's not just a fall in share prices that's worrying, though as 2018 goes on, executives are certainly worried about it as well. Something more fundamental happened. Demand is weakening.
In the third quarter of 2018, chemical production in the European Union fell by 1% and then by 4% in the fourth quarter, the largest quarterly decline in the region in a decade. In the fourth quarter of last year, China's chemical production also fell by 3%. For many executives, declining production in the world's two largest markets overshadowed continued growth in chemical production elsewhere.
Global stock markets saw their biggest sell-off since 2008, as output from European and Chinese chemical manufacturer fell. Therefore, according to Boston Consulting Group, the total shareholder return (TSR) of chemical enterprises has declined for the first time since 2015, and it is also the worst TSR performance since 2012. Although the subsequent rebound in the stock market relieved shareholders, it is still useful to look at what happened to the rate of return of chemical enterprises in 2018 and what can be learned from those enterprises that have bucked the trend.
There's nothing to say: 2018 was a bad year for chemical shareholders, with the industry losing $263 billion in global market value. Of course, the loss of value in 2018 is not limited to chemical manufacturer; it has happened in every industry. However, in terms of chemicals, a large number of layoffs have basically halved the five-year rate of return of enterprises. TSRs (average compound interest rate of return for investors) of large chemical enterprises decreased from 16% in 2013-2017 to 8% in 2014-2018.
Boston Consulting Group studies TSR in a five-year cycle to find trends and observe the long-term performance of enterprises. This explains why the TSRs in the report are still in positive territory despite the sharp decline in the value of chemical stocks in 2018. (see sidebar, "how we calculate and report TSR.". )
In the five regions studied, the chemical TSR decreased compared with the previous period. They perform best in emerging markets, including India. From a TSR perspective, Indian chemical manufacturers continue to perform well. Overall, chemical sales in emerging markets have not shrunk as much as in developed markets.
Of course, the same is true in Greater China, although the region was affected by the decline in production last year. Over the past five years, revenues of chemical companies in Greater China have increased by 13% annually, benefiting from demand in a range of areas such as synthetic rubber and chemicals used for pipes and fittings. In the case of the shortage of natural fiber in the clothing industry, the sales of textile chemicals have improved the profitability of chemical enterprises in Greater China to a certain extent. The only factor hindering TSR of Greater China chemical industry is the compression of enterprise profit multiple, which is the largest of all regions in our study.
An interesting recent development is that, from the perspective of market value of listed companies, the fate of Europe and North America, the two largest chemical regions, has reversed. Neither region has avoided the recession of 2018. There are a lot of Companies in Europe where TSR is not performing well, especially in Germany and multi-disciplinary market segments. But there are also some big winners in Europe's big cap stocks, including pharmaceutical ingredients and additives company Lonza (5-year TSR: 28%) and food ingredients company Chr. Hansen (24%) and fragrance and fragrance producer chihuaton (16%). For the first time since 2008-2012, the TSR of chemicals in Europe (8%) surpassed that of chemicals in North America (4%), the worst in the world.
There is no area where the amount or proportion of low chemical TSR is close to that of North America. Among the top 10 companies in the global TSR ranking, there is no American chemical manufacturer, and the top quarter companies are also very few. Many American chemical companies have been under the pressure of slow growth, with single digit growth rate. One exception is enintegris, a professional firm with a TSR of 20%, five times the North American average. (the company's performance analysis is shown below. ）Affected by the rising cost of raw materials, North American chemical enterprises are also facing difficulties in other components of TSR (including profitability).