Chemicals Chemicals Sector – The capex cycle & what's left for the rally?

The Chemicals Sector has seen a 13% decline in total capex in 2020, as companies have reduced or deferred capex plans in response to COVID-19. On current guidance, the recovery back to higher levels of capex should occur by 2021.

08 Jun 2020

Global capex and y/y growth

Source: UBS estimates, Company data

The bar & line chart shows total global capex and year over year growth from 2006 with estimates for 2020 through 2024.

The capex cycle is fading materially in 2020 but should recover in 2021

Mid-2020 we take the opportunity to review the outlook for capacity plans: we conclude that the capex cycle will fall 13% in 2020 (we aggregate latest UBS global coverage data in this report) but will recover in 2021 on current guidance and our analysts' estimates. From an upstream point of view, and looking beyond 2020, we have already witnessed delays but still lack evidence of cancellations of key medium term.

Evidence needed of capex falling more materially if cyclical rally is to continue

We recognise that demand conditions are improving materially from extreme lows. But we need a much more rapid collapse in capex globally to stoke expectations of sustainable pricing and margin improvement beyond, say, more than a restocking-led quarter. In the absence of this it will be hard to see big enough EPS upgrades, which presumably, at some point, have to take the lead from PE multiple expansions. In other words at a "normal" 15x PE for 2021E for Diversifieds earnings would need to be well above 2019 levels (for 2021E EPS for Diversifieds we are c.7% below 2019 EPS and consensus is +2%) to drive further share price performance. We expect the rally to fade from here.

Updated supply estimates show above-GDP supply growth in key commodities

We also show in this report our updated estimates for key commodities for the European sector, mapping supply growth out to 2022. We conclude that there are few pockets (soda ash a notable exception) of sub-GDP supply growth in the industry, partly due to China's self-sufficiency drive and partly related to expansionist ambitions set in higher return on capital employed (ROCE) periods for the industry (2018/19).

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