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Monday, June 14, 2021

Value creation by chemical companies in 2020

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A year ago, executives at many of the world’s largest chemical companies were still worrying about growth. Demand has weakened, and they worry that the start of the decade may be bumpy.

However, no one expected that to be the case in 2020.

The new coronavirus pandemic hit the industry hard, with chemical stocks initially (March) down 35%. Chemical stocks then rebounded with the market. But the financial and operational impact of covid-19 on the industry is real and will not disappear soon.

According to the estimates of the US chemical Commission, BCG predicts that global chemicals revenue will drop by 9% this year (mainly due to lower prices rather than quantity) and rebound by 10% in 2021. This will bring global chemicals revenue in 2021 very close to $4 trillion in 2019.

However, no one knows the exact situation. Therefore, for chemical enterprises, the key is to make a clear assessment of the current situation, and decide the adjustment according to their own value chain and asset footprint, terminal industry risk exposure, technology, business and digital capabilities.

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End market sales and departmental profitability during the outbreak

We have been tracking the impact of the pandemic on eight major end use chemical markets since its inception. From a financial point of view, in the first half of this year, chemical enterprises with a large amount of exposure to the automotive and aerospace terminal markets were most directly impacted. The negative impact of chemical companies’ excessive involvement in the automotive market is not new; it is a continuing challenge that we mentioned in this report last year. However, the decline in car demand caused by the coronavirus was greater than expected, leading to the rapid deterioration of the adverse situation.

We don’t need to spend a lot of time discussing the risks in the aerospace terminal market. Since March, the huge contraction of air travel has been a widely publicized economic issue, which is also well understood. Of all our chemical samples, only a few of the 246 companies have an aviation terminal market exposure of more than 3%. These companies will have no choice but to cut costs and reduce aerospace related investment.

Another terminal market hit by the beginning of this year is personal care, including perfume and cosmetics. Because many social occasions and face-to-face communication have been shelved, the demand for these items has dropped dramatically.

Since the beginning of the epidemic, electronic products have been mixed. Slowing car sales and retail store closures have dampened demand for electronics, as well as declining revenue from non essential consumer goods. But spending on data centers and other business infrastructure, as well as increased use of home electronics in work and entertainment, have boosted demand.

Then there is the end market exposure, which is obviously more favorable. The epidemic has made people pay attention to the importance of health care products and promoted the development of chemical enterprises serving pharmaceutical enterprises. It also encourages people to cook more at home, benefiting chemical companies that are part of the global food supply chain.

In addition to examining the impact of the pandemic on the end market, we also studied how it affects the profitability of some important product segments. We bet that at some point in March, most chemical executives realized that they might see a big drop in profits. And that’s what happened. Of the 20 chemical products we analyzed, only two had higher profits in the first half of the year.

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