More Profits For Chemical Companies

And cost cutting continues too while profits keep climbing

Welcome to my review of the chemical industry for the 3rd Quarter of 2021. This is my second iteration of doing this special edition and it’s part of my long term plan to monetize the newsletter. You can see what happened in Q2 of 2021 here. This issue is mostly an experiment for now. I’m trying different things to see what works and what doesn’t. Let me know what you think in the comments or responding to this email. 

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The View From 30,000 Feet. Everyone Is Up.

Air Products is up. Evonik is up. Lanxess is up. Dow is up. BASF is up. Mitsubishi is up. Covestro is up. Brenntag, one the world’s largest, if not the largest, chemical distributor is up year over year on revenues and profits despite current supply chain disruptions. The company’s guidance on 2021 EBITDA remains unchanged at 1.2-1.3 billion euros.

If you can’t make more money in Q3 of 2021 as a chemical company compared to 2020 then you fucked up and you might as well just quit because literally every chemical company that I’ve looked at has a cash machine that goes BRRRRR. 

Hurricanes and the Delta variant are not stopping the chemical companies from generating huge amounts of cash, not quite as much as Q2, but still most companies are reporting even better quarters than what they had pre-pandemic. The demand is back for stuff and most stuff requires chemicals or plastics in some way. 

One passage I wanted to highlight from Dow’s earning call: 

Our restructuring program and digital investments will yield $600 million in increased EBITDA. Both are in progress, and our restructuring program is on track to achieve its $300 million run rate by year-end. We also have a suite of higher return, lower risk and faster payback capital and operating investments that will enable an additional $2 billion in EBITDA in the near-term. And our investments to decarbonize and grow at our Fort Saskatchewan site in Alberta, Canada are also expected to deliver approximately $1 billion in increased EBITDA. And as we've already shared, we're executing against a favorable macro backdrop that we expect will continue to support constructive market fundamentals for our key value chains

-Howard I. Ungerleider

Essentially, what I understand Howard to be saying here is that they have cut $600 million in cost out of the business, which goes right to increased EBITDA and they have some more capacity coming online that will generate significant cash and they are planning building out Saskatchewan to be a net zero plant, which will also generate cash. 

From what I’ve read most companies have similar stories about removing cost, increasing profits, investing in capacity or new technologies. Covestro is bringing back their plans to try and build a world scale MDI plant in Texas. Also, there are some divestments that I’ll cover at the end of the month, but it appears that companies are streamlining and specializing. 

The chemical activity barometer that the American Chemistry Council puts out is also coming off of a peak that occurred back in Q2. Remember that during all of this Covestro is also cutting 10% of their workforce. So while the money machine that is the chemical industry right now is still going BRRR there could be some headwinds on the horizon. From the BASF earnings call:

Our downstream businesses are still confronted with further rising raw material, energy and freight costs. Price increases in most downstream businesses could only partially offset these higher costs. In addition, higher fixed costs weighed on earnings.

The semiconductor shortage severely hampered the global automotive industry in the third quarter. Temporary shutdowns and lower run rates in production have negatively impacted our automotive-related businesses, particularly in the Surface Technologies segment. - Martin Brudermüller

The chemical industry essentially needs to keep passing through the costs to their customers to keep their margins from decreasing. Pricing contracts that were negotiated last year for 2021 will be expiring in a few months and those cost increases will start to hit downstream in a big way. For customers who have prices that fluctuate based on the market they are already feeling the pass through cost and those companies are now having to pass through the cost increases. 

I suspect that inflation will continue into Q1 and perhaps even Q2 of 2022. The supply chain and shipping crisis that we are experiencing right now as well as raw material shortages in things like semiconductors might even be holding inflation back a bit. I think if the supply chain woes settle and there is still pent up demand then inflation will keep ripping unless interest rates come back up. 

A Word From My Sponsor

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The View From The Ground

When your coworkers leave and they don’t get replaced it makes your job harder. From what I’ve heard, now is a great time to be getting a new job as a chemist or someone in the chemical industry. Wages right now are apparently the highest they have been ever and companies that have the money to attract talent are doing so at a steady clip.

The companies that are losing talent are doing so for 10-30k a year in salary. If you start to lose one or two people in sales, product development, or technical service then this is pretty normal. It’s to be expected. When you start losing multiples of people and departments that were once staffed at 10-12 people go down to 5 or less then you have a major fucking problem. 

Someone forwarded me this from Harvard Business Review back in September and it rang true for me. I think one thing the author of the piece seems to not get is that people are leaving their jobs and moving to new states over what seems like small sums of money in the sense of the big picture that I wrote about above. I find this puzzling that companies are not working harder to retain talent.

My advice is if you feel that you are underpaid then let your manager know. Ask for more money or a promotion. Tell them that you get approached by recruiters daily offering you jobs with significantly higher salaries than you have now. 

Then wait. See what happens. If you get what you want then great. If you don’t get anything except the cold shoulder then I guess you have your answer.

Remember, most companies probably view you as “unique, but interchangeable.” They might want you to leave so they can bring in someone else at a lower salary. Try not to take this stuff too personally either if you end up getting the signal that you are interchangeable.

The supply chain crisis and price inflation are also forcing companies to do a couple of different things. Companies want to cut costs either through switching suppliers or redesigning products to be cheaper. If you are a smaller company with some additional capacity and you have been hunting some big customers in the past then I would say now is your time to act. 

Follow up with all your contacts. See if they need some help in sourcing new raw materials. You might find yourself talking to a stressed out chemist who needs to find a replacement chemical because their shipment of “low cost” material that was sourced back in 2019 is stuck on a container ship off the west coast. And shipping costs are going up from here too from what people have told me. A low cost material that you can’t get to your plant because of shipping doesn’t really save you any money if you can’t make your product.

What goes up will go down eventually too.

Tony