FTSE 350 Review: Few bright sparks among struggling chemicals stocks

Last year was “one of the toughest periods on record for the entire chemical industry”, according to Victrex (VCT) chief executive Jakob Sigurdsson. This was largely a reverberation from the pandemic, customers of chemicals companies having been so desperate to buy up supplies in 2020-21 that the cupboards remained more or less fully stocked deep into 2023.

Investors reacted as expected to last year's dramatic statements from bosses and (more importantly) earnings downgrades, knocking Victrex and Croda (CRDA) shares significantly. It was a similar story in terms of earnings at Elementis (ELM), although the company didn’t face the same share sell-off in 2023. 

Sigurdsson says restocking is now slowly starting to happen, but others in the sector have forecast improvements in volumes only later this year. Jefferies analysts say the industry should see some recovery in volumes by the second half, albeit after further falls in Q1. 

Each company has its own set of niches, however, so broad forecasts don’t capture the whole picture. Victrex has five key divisions, for example: aerospace, e-mobility, knee, magma and trauma (the magma division sells pipes to the energy industry, rather than anything red hot). 

Croda and Elementis sell into the pharmaceutical and beauty industries. The former company has more of a ‘personal care’ focus, while Elementis has greater industrial exposure through its coatings business, which contributes around half of sales. “Coatings is currently in the most challenging demand environment since the global financial crisis,” chief executive Paul Waterman said in November. 

Both companies agree personal care is the right place to be – Waterman said it was a “high-margin business operating in attractive markets”. Going into detail about the actual products requires a descent into jargon, but effectively Elementis sells ingredients that make antiperspirants and similar products work. 

The company has slimmed down its number of operating divisions in recent years, leaving only personal care and coatings. At a November capital markets day, Elementis management reiterated previous goals around margins and cash conversion, which it has yet to meet. This, though, is not surprising given the goals of a 19 per cent operating profit margin and operating cash conversion above 90 per cent were set in 2019.

Despite all the gloom, these companies are still selling into staple industries. Out of the four FTSE 350 chemicals companies, only Elementis has habitually had a negative return on equity (RoE), while Victrex has maintained its own RoE just a few percentage points below the 2019 high of over 20 per cent. There may be bargains available here.