Chemicals Chemicals Sector - Starting to get a handle on the scale of the Q2 demand problem

Latest macro indicators in Chemicals continue to weaken, including Autos where IHS production forecasts have been lowered. As the largest sector vertical, near-term headwinds could be substantial & a challenge where re-financing is needed.

06 Apr 2020

Quarterly car sales estimates, by region

Sizing the Q2 demand problem

Company announcements in the sector last week confirmed recovering activity levels in China, but became sequentially more negative on current trading. Diversifieds and Specialties two sub-sectors recorded sales down ~25% in Q109 vs Gases only -5% on average, although with double-digit declines in the following quarters. With only 1/6 of our European Chemicals coverage having abandoned targets or warned on earnings so far, we think more are likely to follow in the coming weeks with cyclicals most exposed.

US, EU indicators at multi-year lows could limit impact of China recovery

The latest macro indicators for March point to an increasingly negative picture. The March ISM survey showed the new orders index falling to 42.2 (vs 49.8 in February) a cycle low, and the US Chemical Activity Barometer was down 8% y/y in March, the worst monthly reading in 75 years. The underlying data showed negative production trends in nearly all chemical product areas and orders declining. The March Service PMIs in Europe, lastly, fell sharply to 26.4 from 52.6 in February.

Autos enter Q2 at a worrying run-rate

Last week a host of auto newsflow shed some light on just how deep the Q2 recession might be. This overshadowed some more positive news out of China where production has started to normalise and current EV subsidies have been extended. In our recent recession scenario analysis, we had assumed a decline of 20% in 2020E and latest forecasts are not far off this. Being the largest vertical for the chemical industry, the near-term headwinds could be substantial and prove a challenge for companies where auto exposure overlaps with re-financing needs.

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