Chemicals: false prophet of the recession?

Destocking, price cuts… After a difficult second quarter, earnings warnings are coming in thick and fast from European (Lanxess, Victrex, DSM-Firmenich…) and American chemists: HB Fuller, Ashland and even Cabot, which admits to facing “a prolonged destocking cycle” to which China’s moribund recovery is no stranger. In the firing line of the downturn in purchasing managers’ indicators (PMIs) since mid-2021, the sector has been affected by the caution of customers who are preparing for a recession, while the white bread of post-covid overstocking seems to have been definitively eaten. This year, business volumes could fall back to 2016 levels, leading to a sector recession comparable to that of 2008! Are chemicals (7% of global GDP) the horseman of the economic apocalypse? 
The word “destocking” is spreading to managers in the packaging, maritime and road logistics sectors. A bird of ill omen, it is spreading at an exponential rate in the conference calls that accompany the publication of the quarterly accounts of S&P500 companies. There have already been almost 300 iterations this month. Twice as many as in the second quarter of 2019. Back then, companies were delivering accounts weighed down by the slowdown in global growth and the sclerosis of the Sino-American trade war.
The markets, however, did not seem to be overly perturbed by the upheavals in the chemicals sector, even though it was at the forefront of the economic cycle! Despite the asphyxiation of activity, the Stoxx 600 Chemicals index has risen by 3% since the start of the year. The gap with the sector’s two main outlets, construction (+15%) and automotive (+20%), which are equally cyclical, is particularly striking. Investors (after a year and a half of destocking!) may already be convinced that the hardest part is over. They prefer to focus on the good news, which is not absent from this publication season. Positioned ahead of the cycle, some manufacturers, such as Renault, are revising their targets upwards: the standardisation of the supply chain is enabling the long-awaited delivery of more expensive models, which used to have to wait nine to twelve months between signing for a dealership and receiving the keys. At the same time, in the United States, construction expenditure linked to the relocation of factories is soaring: almost 200 billion dollars this year! 
Finally, the highly asynchronous nature of the slowdown is reassuring. The absence of a widespread collapse in demand in the secondary sector keeps alive the hope of an economic soft landing. However, this proposal should be qualified by the conditional: core inflation, which continues to rise (5.3% in May in the eurozone), is not encouraging the ECB to turn away from its roadmap, quite the contrary. 
With more ground to cover than the Fed on the road to monetary tightening, and economic surprise indicators less favourable than in the United States, the climb to the top of terminal rates is entering a delicate phase in Europe. 
For the old continent, a little extra growth from China would be welcome to help digest the pill of the rate hike, expected to be around 3.85% at the end of the year. Unfortunately, the latest data from the Middle Kingdom do not yet point to the industrial rebound so eagerly awaited by European exporters. 
However, if we want to focus on the positive, we can console ourselves by looking at European gas reserves. The slowdown in the German chemical industry has helped to limit the spike in gas prices this winter, while the filling rate should reach 100% by mid-September!

Thomas Planell, Portfolio manager – analyst at DNCA. This article was finalised in June 30th, 2023.

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