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FTSE 350: Central to the dash towards net-zero

Despite near-term challenges, demographics and market dynamics remain favourable for the industry over the long haul
FTSE 350: Central to the dash towards net-zero

Over the past decade or so, you could say that the global chemicals industry has been characterised by increased consolidation and an investor preference for speciality over bulk production. Events in Ukraine, and the resultant deficit in ammonium nitrate production, add a different context.

The disruption wrought by Russia’s invasion brings home the centrality of the industry to our everyday lives, a point that could become even more obvious if Russian gas supplies are choked off to Germany, which accounts for 70 per cent of the European chemical export market based on the €192bn (£160bn) in foreign sales it generated in 2020. The reliance on Russian gas imports amounts to nothing less than a major strategic issue for a country that is wedded to the idea of an accelerated energy transition. 

Cost-push inflation for energy and raw materials is having an impact across the sector, although it is difficult to predict the degree to which this will drag on profitability. Input prices for speciality chemicals companies have headed north due to higher global crude prices, and their ability to pass on these cost increases to customers is largely dependent on their market positions in certain product groupings.

The FTSE 350 index features a handful of diversified chemical companies engaged across a range of applications, from the production of specialist polymers and advanced performance materials to the production of green hydrogen. The companies serve a wide array of end markets, so pandemic outcomes across the group were mixed.

It’s worth remembering that there are some negative supply-side issues at play beyond the situation in Ukraine. Chemical companies moved into 2022 after negotiating challenging market dynamics in 2020-21, as the spread of Covid-19 resulted in divergent demand for plastics and speciality materials. In the case of the former, it seems likely that the increase in ecommerce during lockdowns increased the volume of plastics used in packaging in Europe and elsewhere, even as demand for speciality materials ebbed away due to reduced industrial applications. Over a longer timeframe, the plastics sector will face some disruption due to increased environmental strictures and changes to the oil and gas industry, and perhaps even reduced feedstock.

Segments of the chemical industry will be affected to varying degrees as society is gradually weaned off fossil fuels, but the industry is evolving to meet the prevailing zeitgeist. New opportunities will not only be linked to rising living standards in emerging markets, but also to changes in the way we capture and store energy, along with the development of new agricultural and life science technologies. So, despite a succession of setbacks since early 2020, the long-term investment case remains intact.

 

NAMEPrice (p)Market cap (£mn)12-month (%)Fwd PEYield (%)Last IC View
Croda International7,67810,71213.0%311.4Hold, 7330p, 1 Mar 2022
Elementis127741-3.0%142.0Sell, 114p, 4 Mar 2022
Johnson Matthey1,9183,543-40.0%93.9Hold, 2,174p, 24 Nov 2021
Synthomer2981,394-40.0%85.6Buy, 266p, 4 Mar 2022
Victrex1,8261,588-21.0%193.2Hold, 2,430p, 6 Dec 2021
Source: FactSet