Chemical companies worldwide are suffering from economic malaise in Europe and China, but could be experiencing a rebound in Japan thanks to Abenomic monetary policies, according to chemical industry experts.
In a Citigroup Inc (NYSE:C) research note from Thursday on The Dow Chemical Company (NYSE:DOW), the biggest U.S. chemical company and the second largest globally, analyst P.J. Juvekar wrote: “The more acute problem now for DOW and the industry is the slowdown in Europe and China.”
Dow’s business unit that sells coating and construction materials, for instance, is facing tough conditions in Europe and China. There’s also an oversupply of the key chemical epoxy in China, making it tough for companies like Dow to sell there.
China’s slowing economic growth is expected to impact the global economy heavily. A weak and unstable recovery in Europe, particularly in the euro zone, partly accounts for soft demand for chemical products there.
A Barclays PLC (LON:BARC) note from July on global chemicals also states that it will likely be 2014 before demand for chemicals in Asia picks up significantly, leaving mostly flat market demand in place for 2013.
“Earnings for the chemical space in 2Q could be a bit soft and we would not be surprised if 2H earnings for multiple companies drift down,” wrote Barclays analysts then.
Dow reported an earnings per share (EPS) boost of 16 percent from the year before in late July, though sales were flat year-over-year.
German global chemical giant BASF SE (ETR:BAS), the world’s largest chemical firm by sales, saw net income shrink by 4 percent in its latest quarter.
BASF blamed underwhelming markets in Europe and China as a partial factor, reported Reuters.
But for Japanese chemical companies, the outlook seems significantly brighter, partly because of Abenomic monetary policy, which focuses on massive money printing and fiscal stimulus.
Japanese chemical companies have seen stock prices soar within the last six months, according to Anton Ticktin, a partner at chemical specialist investment bank and mergers and acquisition advisory The Valence Group.
In its latest July newsletter, Valence said its specialist global chemical indices were strongly influenced by one factor for the first time in recent memory: Abenomics.
“Most Japanese chemical companies have outperformed global sector peers especially over the last six months,” said the newsletter. Japanese ink companies like DIC Corporation (TYO:4631) and Toyo Ink SC Holdings Co Ltd (TYO:4634) did especially well.
Ticktin told International Business Times that surging domestic demand, again partly due to Abenomics, has a particularly positive effect on Japanese chemical companies.
“The chemical companies have done much better than the general [Japanese] markets, because they rely very heavily on the home market,” he said. “They don’t really export much from Japan.”
“We expect Japanese [chemical] companies to be more aggressive, with stronger balance sheets and strong income growth,” said Ticktin.
Increasing domestic consumption of light goods, cars and packaging, for example, will boost chemical companies. “Any growth in the home market in Japan is very beneficial for the chemical industry,” said Ticktin.
Others are slightly more skeptical about the immediate impact of Abenomics.
Tony Potter, who heads Asia Pacific chemical research for global consultancy IHS Global Insight, told IBTimes that the impact is probably “minor,” for now.
“I’m not sure it’s filtered through yet,” he said of an Abenomics-driven boost to Japan’s chemical industry.
“The big chemical companies, the Mitsuis and Sumitomos -- they are global in nature,” he said. “It’s more the health of the global cycle, rather than any dependence on Japanese domestic demand that’s going to change much.”
He noted a significant chunk of Japanese petrochemical business is still export-focused, and depends heavily on economic conditions and market demand from China.
In the first quarter of this year, Mitsui Chemicals, Inc. (TYO:4183), exports recovered, said the company in its recent statements. Mitsue Chemicals said in 2009 that it was aiming to bring overseas sales to half of overall sales by 2015, representing 1 trillion yen ($10.3 billion).
As for increased Japanese domestic demand, Potter questions whether that’s best explained by Abenomics, or by a more general improvement in GDP growth seen over the past few years, partly due to infrastructure reconstruction.
“At the end of the day, the Japanese petrochemical industry has actually been consolidating and closing down capacity,” Potter said.
In the U.S., a recovering housing market is boosting chemical sales of adhesives, paints and coatings.
Ethylene, a widely used chemical component in plastics, packaging,and industrial applications, has also brought success in the U.S.