Weak first half volumes and a profit warning from Yule Catto (now Synthomer: SYNT) in June made chemicals an unlikely candidate for a top-three performer during the summer. Yet a pick-up in the past few months of the year meant the sector posted a gain of 36 per cent for 2012. We backed all of them at some point and understand the attraction, yet even the niche operators will struggle to match that performance in 2013.
Higher costs remain a constant threat and, given the need to maintain what for many are near-peak margins, turning down less lucrative work could limit volume growth for the speciality names. And analysts expect weak economic visibility to keep driving short inventory 'mini-cycles' rather than the wild restocking and destocking of the past few years.
But that's not necessarily a bad thing. Global economic growth appears to have troughed and firms with strong market share, pricing power and niche products should still be able to increase profits. Those qualities propelled AZ Electronic Materials (AZEM) – a 2012 Investors Chronicle tip of the year – to new highs, and demand for smartphones and other gadgets, which use AZ's huge portfolio of clever chemicals, shows no sign of slowing.
Of course, it could be a bumpy ride. A number of the larger players – former buy tips Johnson Matthey (JMAT) and Croda (CRDA) stick out – have struggled to regain momentum in recent months and remain range-bound. That certainly vindicates our decision to bank a 35 per cent gain on Croda. Making ingredients for anti-wrinkle creams and cosmetics won the company promotion to the FTSE 100 index, but the shares now look fair value.
Valuation is a concern at Victrex (VCT) too. Our sell tip in May looked well timed given short visibility and economic turmoil in the eurozone, the company's biggest market by far. But it’s a well-run business with great products and the shares have rallied since our upgrade in October. When conditions improve, the share price will too. We’re watching.
And keep an eye out for special dividends. Elementis (ELM) has already promised to distribute up to half its year-end net cash – recently estimated at $50m (£31m) in 2012 – and Croda will probably follow suit if it doesn’t spend on acquisitions. Johnson Matthey has form here, too. So although a repeat of the company's 100p a share payout last summer looks unlikely any time soon, that could change. Weak platinum prices are unhelpful, yet tougher emissions legislation over the next few years drives demand for catalytic converters – the switch to Euro 6 for new European trucks has already begun.
COMPANY NAME | LATEST PRICE (P) | MARKET VALUE (£M) | PE RATIO | DIVIDEND YIELD (%) | PERCENTAGE CHANGE IN 2012 | LAST IC VIEW |
ALENT | 317 | 882 | na | 0 | na | Hold, 305p, 20 December 2012 |
AZ ELECTRONIC MATERIALS | 352 | 1,341 | 15.9 | 2.3 | 45.5 | Buy, 358p, 4 January 2013 |
CRODA INTERNATIONAL | 2,388 | 3,231 | 18.7 | 2.4 | 31.7 | Hold, 2,379p, 24 July 2012 |
ELEMENTIS | 236 | 1,071 | 10.4 | 1.9 | 69.5 | Hold, 211p, 31 July 2012 |
JOHNSON MATTHEY | 2,388 | 4,893 | 15.5 | 2.4 | 29.5 | Hold, 2,175p, 21 November 2012 |
SYNTHOMER | 197 | 670 | 9.1 | 2.3 | 14.8 | Buy, 151p, 28 August 2012 |
VICTREX | 1,634 | 1,382 | 19.1 | 2.3 | 47.7 | Hold, 1,572p, 11 December 2012 |