Market analysts said that during the pre-disclosure period of the second quarter results that just passed, many chemical companies issued profit warnings for the second quarter and the whole year of 2023. The surprising thing about this profit warning is not only the number and magnitude of chemical companies that lowered their profits, but also the variety of chemical companies that sounded the alarm, including bulk chemical companies, specialty chemical companies, and agrochemical companies. The chemical industry is bracing for an outlook that may be far less rosy than it was at the start of the year.
Manufacturers cut profit expectations
The latest profit warnings came from German specialty chemicals maker Evonik Industries and U.S. agrochemicals company FMC. Evonik Industries announced on July 10 that due to weak economic recovery, the company's adjusted profit before interest, tax, depreciation and amortization in the second quarter was 430 million to 450 million euros (about 3.444 billion to 3.604 billion yuan), only slightly better than one. 409 million euros in the quarter. Adjusted EBITDA for the full year is now expected to be in the range of 1.6 billion to 1.8 billion euros, compared with the previous forecast of 2.1 billion to 2.4 billion euros. "We've never seen such persistently weak sales, or such a prolonged period of weakness," said Evonik CEO Kuhlmann. Evonik said demand in all end markets was very weak in the second quarter , customers continued to destock, especially in specialty chemicals. As the destocking of commodities may draw to a close, the destocking phenomenon that started in commodities is spreading to a wider range of industries. Evonik Industries serves a very diverse range of markets, from agriculture to automotive and machinery, coatings, construction, electronics, food and beverage, personal care, metals and mining, oil and gas, water treatment, plastics and rubber, pulp and paper, and more. In response, Evonik will rein in costs, including by not filling vacant positions, and cut capital spending to 850 million euros this year.
FMC's profit warning issued on the same day was even more shocking because it highlighted severe weakness in demand in the agricultural sector. FMC now expects adjusted EBITDA for the second quarter to be $185 million to $190 million, compared to a previous estimate of $350 million to $370 million, and lowered its EBITDA for this year to $1.3 billion. ~$1.4 billion, compared with the previous forecast of $1.55 billion to $1.56 billion. FMC companies not only produce crop protection chemicals such as insecticides, herbicides and fungicides, but also non-crop chemicals of the same type that are sold in retail stores as consumer products. "We wouldn't normally be shocked if we saw a 50% cut in EBITDA estimates for commodity companies, but seeing FMC's theory We were surprised by a cut in EBITDA forecasts from more stable agrochemical suppliers in the world."
The outlook for the second half of the year is not optimistic
Expectations earlier this year for a global economic recovery in the second half of the year have clearly been dashed. It was this earlier rosy outlook, which was not at all supported by leading economic indicators, that largely contributed to the downward revision to the full-year 2023 forecast.
The key leading economic indicator, the manufacturing purchasing managers' index (PMI), has been falling for months with no signs of recovery in sight.
The situation is different for the services sector, which continues to be in expansion mode. With much of the manufacturing sector already in recession, it is the services sector that is really supporting the global economy.
European contract and spot spread widened
Another negative sign for chemical products comes from Europe. The gap between contract prices and spot prices for European chemical products is widening as the spot price decline accelerates. Obviously, the contract prices of European chemical products still have room to fall further.
Destruction of downstream demand from ongoing economic woes has prompted buyers to renegotiate contracts for the remainder of the year. Some buyers are even considering switching to the spot market to take advantage of the currently lower spot prices. "The spread between spot and contract prices is staggering. It's a real nightmare for those buying at contract prices," said a European chemicals buyer.
U.S. LBB index down
The Business Barometer (LBB) index of ICIS, a global energy and chemical industry market information service provider, shows that the U.S. economy will still experience recession in the future. The U.S. LBB index in June fell 0.2% from May and fell 7.2% year-on-year.
Calvin Swift, Senior Economist for Global Chemicals at ICIS, said, "The cumulative decline in the U.S. LBB index is 9.5% from the peak in February 2023, which is much higher than the cumulative decline of 3% in the past. The decline threshold, when the decline reaches 3%, it means a recession.
The LBB is derived from 17 forward-looking indicators related to raw materials production and other cyclical-sensitive industries whose growth has historically led the U.S. economy.
Weakness in demand may continue
The demand for chemicals in the second quarter was obviously worse than expected, and destocking is still a big theme, especially in the field of specialty chemicals. "Demand for specialty chemicals appears to be low," UBS chemical analysts said in an analysis of aggregate trends among chemical companies with more specialty chemicals businesses versus those with more basic chemicals businesses.
UBS analysts said in a research report, "Considering the prolonged destocking period and consumers' cautious purchases, weak demand may continue for a while. Even if destocking is finally realized, it will not be able to solve the underlying weak demand for commodities and overcapacity problem".
KeyBanc Capital Markets analyst Alexei Yefremov said: "Investors are looking for signs that the destocking cycle that could boost demand is over, which is a new source of optimism. We agree that the end of the destocking cycle The inventory cycle will help boost demand, but I don't think the problem of oversupply of bulk commodities will disappear in the next few quarters." (Pang Xiaohua)
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