Halfway Through 2022: Current State of Chemicals

Things are strong

Happy August Everyone,

From what I can tell the state of the chemical industry is healthy and thriving with respect to the financials (at least in North America and Europe). All companies are/were dealing with supply chain issues, raw material price increases, and demand that just does not quit (at least for now). I had suspected we were maybe headed into recession, but with these numbers it’s hard to make that argument especially with the recent unemployment numbers in July.

DOW 0.00%↑ had a sales increase of 13% YoY, but compared to Q1 things are a bit down when it comes to profitability.

BASF had a 16.3% YoY sales growth with flat EBIT compared to last quarter before “special items.”

Evonik had a 12% YoY increase in EBITDA and they are pivoting away from natural gas to prepare for when winter comes.

EMN 0.00%↑ is showing increases in both revenue and profitability for this quarter YoY across all of it’s business segments.

Even HUN 0.00%↑, who has been under shareholder pressure, was able to show both an increase in sales and income in Q2 both QoQ and YoY (guess they are getting it together).

DD 0.00%↑ reported a solid quarter and they are coming out of their company pivot swinging. Ed Breen, the CEO, discussed how their M&A strategy has been paying off:

Finally, we completed the sale of the biomaterials business at the end of May, which was the last of our previously announced non-core business divestitures. Since 2019, we generated gross proceeds of over $2.2 billion by divesting eight non-core businesses, which collectively produced lower growth, lower margins, and overall higher volatility in earnings. We received solid value for these divestitures, selling them at a low double-digit EBITDA multiple.

If we move downstream a bit, PPG 0.00%↑ is crushing it with their YoY increase in sales and profitability. PPG was able to grow their margins despite a crazy increase in raw material prices by passing those costs to their customers. Michael McGarry, CEO of PPG, elaborated on this to this shareholders during their quarterly update:

To quickly summarize the quarter, our sales performance was an all-time record, driven by continued realization of real-time price increases that are now fully offsetting total cost inflation. Total cost inflation includes generational high-commodity cost inflation, energy, logistics, and other employee-related cost inflation.

SHW 0.00%↑ was mostly able to maintain their margins and deliver slightly higher sales numbers, but faced headwinds in China and shortages on alkyd resins. Sherwin was able to capitalize on demand in North America, but everywhere else appeared to be a problem for them (China 👀). Sometimes being the biggest coatings company in the world is a tough boat to steer.

Companies that primarily make stuff for residential construction (OC 0.00%↑ 👀) might start to see some headwinds because it looks like new housing starts are starting to decline due to higher mortgage interest rates. This might look like a bit of demand destruction for resins and chemicals used as sealants, insulation, adhesives, and architectural coatings.

Oil futures are down around $90 per barrel and as I wrote last week raw material prices for chemicals will start to fall in the coming months. These companies that were pushing these price increases down the value chain will do their best to slow roll the price drops to eke out as much profit as possible per month, but if they slow roll it too much I suspect there is some risk of alternative suppliers that were recently qualified getting more business.

The other thing I noticed in looking at all of these quarterly reports is that the chemical industry is all in on Environmental, Sustainability and Governance (ESG) reporting. This type of reporting might manifest as a sustainability report, but the goal is overall the same: show how the company is moving towards the future of being a better global stakeholder.

There are often two camps when it comes to ESG. Those who believe in it and those who think it’s absolute bullshit. I tend to fall into the first camp because the chemical industry I grew up with didn’t care about any of this stuff. Having worked with some of the people on these types of things I believe that the contributors on the ground are earnest in their attempt to make things better. Maybe even the executive leadership of these companies care too. If you are skeptical just think about these companies even reporting or looking at these things as opposed to not doing anything.

I don’t see any massive layoffs happening, but it appears to be that there are hiring freezes in effect at some companies just based on some anecdotal evidence that I’ve collected via Twitter. I think it’s still a great time to be graduating, with employment at all time lows, and the competition for talent is fierce.

The state of the chemical industry is strong this last quarter and with falling raw material and shipping prices I think things will remain strong into Q3 and likely Q4. It all comes back to demand not “falling off a cliff.” Maybe we will get “back to normal” or whatever normal looks like?

Maybe normal will be net-zero steam crackers in a few years?

Tony