Chemicals and Specialty Materials Market Insights

Key Takeaways

  • Feedback to date from public and private companies points to relatively resilient Q1 performance – nevertheless, the general consensus for Q2 is for 20%+ year-over-year sales declines.
  • We expect protracted challenges for select end markets such as automotive and oil & gas, while businesses catering to personal care, cleaning/sanitation, packaging, and water treatment, among other sub-sectors, remain relatively well positioned.
  • As conditions improve in the coming quarters, the chemicals and specialty materials industry should continue to benefit from growing M&A interest across buyer categories.

Introduction

Despite significant near-term challenges stemming from the COVID-19 crisis, the chemicals and specialty materials industry continues to offer compelling M&A opportunities for strategic and financial buyers alike. While the majority of current industry efforts are rightfully focused on employee safety, liquidity management, contingency planning, and other protective measures, leading industry participants are also strategizing about post-crisis dynamics and opportunities. Our goal in this update is to provide insights from real-time news and data as well as prior economic disruptions – we hope you find the takeaways helpful and encourage you to contact us if you would like to discuss our perspectives or capabilities.

Learnings from Prior Economic Disruptions

Chemicals and Specialty Materials Benchmarks Through Crises

The chemicals industry generally outperformed the broader market during the Great Recession, but has experienced a more pronounced decline amid the COVID-19 disruption largely due to the added impact from depressed oil prices.

Specialty Chemicals experienced a far quicker recovery during the Great Recession, returning to pre-crisis levels over 3.5x faster than Commodity Chemicals, a trend we expect to see again during the COVID-19 crisis.
 
Source: Capital IQ
1. The left Y axes correspond to the S&P indices, indexed to 100 on 01/01/2007 and 01/01/2018, respectively; the right Y axes correspond to the daily price of crude oil in USD
 

Chemicals and Specialty Materials: Key End Market Performance

Relative to the Great Recession, post COVID-19 stock performance points to similar challenges for highly cyclical sub-sectors, albeit with some optimism for a more rapid recovery given stronger consumer and financial system balance sheets.

Additionally, given the virus-driven nature of the current crisis, we see better prospects for pharmaceuticals and non-durables, the latter including household and personal use products.

The last few weeks have seen multiple sectors recover meaningfully from trough COVID-19 levels, though the near-term sustainability of those gains remains uncertain.

Source: Capital IQ
2. Have not returned to pre-recession peaks
3. Defined as the lowest market capitalization of the index within 365 trading days of peak, composed of indices compiled by S&P Global and Dow Jones

C-Suite Commentary

“This is a very unusual situation, so I think discipline is now with capital letter D in our vocabulary. So we keep our eyes and ears open if there is a good M&A target, but it’s probably a little bit too early in that whole dynamic for somebody to raise their hand or be even open for such conversations... But I can assure you our M&A team is keeping their eyes and ears open.”

Thierry F. J. Vanlancker, Chairman of the Board of Management and CEO, Akzo Nobel

“The current demand backdrop is the most challenging we have seen in over a decade. The current downturn is different than the recession of 2008-2009, primarily because we are not facing a true peak to trough reset following the already challenging demand landscape in 2019.”

Lori Ryerkerk, President and CEO, Celanese Corporation

“Evonik has had pandemic plans for many years. They determine how to proceed in the event of a pandemic or epidemic. Catalogues of measures and expert staff enable us to react to new developments, including at short notice. Evonik has largely suspended business trips. Most events have been cancelled or postponed. Personal social contact in daily work is being kept to a minimum, in order to keep the risk of infection as low as possible.”

Public Announcement, Evonik

“Since early March, in China, we have seen a measured recovery in demand patterns. Our factories in China have been running at 70% to 80% of capacity utilization for several weeks, moving closer to our 2019 levels and mirroring the needs of our customers’ demand. We’ve also learned a lot for the restart in China, which we’ll be able to leverage and optimize as other countries are beginning to restart their economies over the coming weeks.”

Michael H. McGarry, Chairman and CEO, PPG Industries

“The entire global supply chain has been impacted due to the COVID-19 outbreak, which has led to disruption in marine container shipping services. To allow adequate booking time in the current environment, we are asking all customers to provide an additional lead time for non-marine based shipments and 2-4 weeks lead time on all marine orders.”

Mark Costa, CEO, Eastman Chemical Company

“Nutrien continues to expect solid demand for crop inputs for the spring season, despite some recent wet weather in the US, which has caused modest delays in field activity in some regions of the country. Our business is deemed essential by governments around the world, which underscores the criticality of the agriculture sector.”

Chuck Magro, President and CEO, Nutrien

“We fully understand that a key measure for containing the spread of COVID-19 is to limit contact with others and reduce time spent in public places. For these reasons, we are temporarily closing our store sales floors and driving customers to order products online or via phone for delivery or curbside pickup at the stores.”

John Morikis, Chairman and CEO, The Sherwin-Williams Company

“In today’s highly uncertain macro environment, we are reducing capital spending, working capital, and operating costs to ensure we continue to generate strong free cash flow. We are adjusting our manufacturing operations to match lower near-term demand.”

Hudson La Force, President and CEO, Grace

Conclusion

“Fully recognizing the severity of the ongoing crisis on the chemicals and specialty materials industry, we see a wide range of opportunities and expect robust M&A activity in the industry once conditions stabilize,” says John Lautemann, director in the Harris Williams Industrials group.

Patrick McNulty, managing director in the Harris Williams Industrials Group, agrees. “We expect the industry’s resiliency and strong long-term fundamentals will continue to spur investor interest – this crisis will require discipline and patience in the coming months, but there is still a lot of optimism about the sector’s outlook over the broader horizon.”

Published May 2020

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