Chemical and capital markets are back at the top
At the beginning of 2018, the chemical industry has again become the leader in its value chain.
The stock market has reached new highs and the global economic outlook is generally optimistic. These two factors have created a positive background for chemical stocks in early 2018. Over the past year and a half, the chemical industry has outperformed the world stock market by announcing a 24% compound annual growth rate (CAGR) of total shareholder return (TRS), one fifth higher than the world market. In this paper, we first introduce our new analysis of the performance of the chemical industry, including the development review since mid-2016 (our last capital market report 2) and the update of our long-term outlook on the performance of the industry. Second, let's look at the reasons behind this performance and the outlook for the industry.
Chemical industry and related industries: back to the top
Over the past year and a half, the performance of the capital market of the chemical industry has provided a TRS level higher than that of the global market as a whole. This marks a return: since 2000, the performance of the capital market of the chemical industry has mostly surpassed that of the global market, and has gone through the following three stages:
From 2000 to the end of 2012, the compound annual growth rate of the chemical market reached 10%, far exceeding the global market performance of TRS, while the compound annual growth rate of the global market was 3%. During the 2008-09 financial crisis, the performance of the chemical industry declined more significantly than the overall market, and then rebounded sharply from 2009 to 2012.
From the end of 2012 to the beginning of 2016, the performance of chemical TRS recovered to the same level as the world market, even slightly behind. The reason for this is that the advantages of shale gas driven raw materials in the United States, which has previously boosted the industry, have been largely "digested". "At the same time, all equity sectors around the world have seen the strong performance of capital markets after the financial crisis.
Since mid-2016, the performance of chemical TRS has taken off again, with a CAGR of 24%, while the global market has a CAGR of 19%. The main reason is that M & A activities in the chemical industry generally supported by investors have increased significantly, and petrochemical producers have gained a more favorable supply and demand position, resulting in strong profit growth. The strong performance of the past two years has made the chemical industry the industry with the best long-term performance of TRS in the whole value chain (starting from 2000).
Looking at the chemical industry geographically, from August 2016 to December 2017, Asian chemical companies - including companies from Japan Chemical Industry and other Asian countries - reported particularly strong TRS performance. Both companies outperformed the local stock market. The biggest growth was seen in Asian companies other than Japan, whose TRS performance has stagnated since the end of 2011, with a 31% increase. In the past 17 years, such companies have grown significantly from a low base. It has risen from 7% of global chemical stock valuations in 2000 to 16% of the industry's valuations, more than quadrupling over the same period to nearly $1.5 trillion.
Why can the chemical industry surpass other industries in its value chain? We see three main factors. First, the position of the industry in the value chain has been strengthened. This enables it to maintain higher profitability, which is the result of its productivity improvement work.
Second, the chemical industry has benefited from China's strong demand growth over the past 20 years. This growth outpaced the growth of China's own chemical production, allowing producers in Western Europe and North America to grow, despite their nearly stagnant domestic markets.
Third, the products of the chemical industry play an important role in most aspects of modern life. Many participants in the chemical industry have been able to use their innovative ability to find new trends in profit growth. At the same time, many of the intellectual property rights and technological know-how used to make molecules owned by the industry are not easy to obtain, which makes the existing manufacturers in a strong position.
In addition to these fundamentals, some of the industry's performance has been supported by other external developments. The most important is that from 2000 to 2013, natural gas raw materials with favorable prices can be obtained in the Middle East and North America, as well as the rising prices of agricultural products.