The FTSE 350 chemical index has rallied 55 per cent per cent since its autumn lows, as investors have bet on global growth picking up some time this year. But there have also been signs of profit taking, and with good reason, too, as some key customers downgrade their profit guidance.
In the case of Croda, manufacturer of chemicals for cosmetic companies, its share price fell over 5 per cent after Clarins and L'Oreal issued profit warnings due to weakening demand. Johnson Matthey, which produces catalytic converters used in the auto industry to reduce pollution, has seen its shares fall by over 6 per cent in the past week on fears that the car manufacturing crisis will deteriorate even further. Toyota shocked the market in late December by lowering its full-year guidance to an operating loss of Y150bn (£1.1bn) from its October Y600m profit forecast. Chinese car sales fell 10 per cent year-on-year in November, having risen 8 per cent in October and Brazilian car sales have also slowed dramatically in November, down 25 per cent on 2007.
Elsewhere in the sector, the bravery of polymer manufacturer Victrex is paying dividends (literally). The company increased its full-year dividend by 6 per cent in late December after delivering a profit warning earlier that month. Sales of his high performance thermoplastic, PEEK, rose 5 per cent in the 12 months to 30 September 2008, but almost halved between October and November, and Victrex said it expects a challenging 2009. Chromium chemicals group Elementis has been under pressure, too. In the past four months, its shares have halved in value and recently slid almost 8 per cent in one day in reaction to a profit warning from DuPont.
Although only four chemicals companies are listed in London, they are part of the broader European chemicals sector, which has risen by over 15 per cent in the past month. However, this should be put into perspective as over the past year the sector is still down by a third.
Globally, the industry is facing troubled times. This is highlighted by the collapse of Dow Chemical's deal with Kuwait worth $17.4bn, partly as a result of the decline in the value of Dow Chemical's assets and partly due to pressure from Kuwait's parliament. So, although the chemicals sector has been savagely derated, with evidence of falling demand among end customers, there may be some way to go before the bottom is in sight.
Summary of sector:
| Company | Price p | Mkt. value £m | PE ratio | Yield % | 12M price chng % | Last IC view |
|---|---|---|---|---|---|---|
| CRODA INTERNATIONAL | 558.5 | 761 | 13 | 3.0 | -3.0 | |
| ELEMENTIS | 40 | 179 | 4.6 | 7.3 | -45.0 | |
| JOHNSON MATTHEY | 1146 | 2460 | 11.9 | 3.2 | -38.4 | |
| VICTREX | 519 | 430 | 10.9 | 3.5 | -27.0 |
