Chemicals companies produce the compounds used in a huge variety of different industrial and consumer products across sectors which include agriculture, healthcare, technology, aerospace, sports, leisure and beauty.

The breadth of the industry’s focus means its fortunes are closely tied to the economy and movements in GDP as well as volatility in raw material prices and energy costs.

In 2023 the sector endured a particularly difficult year. ‘Disruptions to supply chains raised costs; and – most significantly – buying trends after the pandemic reduced demand: customers stocked up on chemical products just after the end of the pandemic and have not yet exhausted this stock,’ says Edison analyst Neil Shah.

In its industry outlook for 2024, ratings agency Fitch said: ‘We expect little to no recovery, and high uncertainty, despite bottom-of-the-cycle conditions in 2023. The weaker-than-expected post-lockdown chemical demand recovery in China, where significant new capacity has been and continues to be built, is fuelling global deflation of chemical prices and margins.’

Berenberg have a more positive view on how this year could play out arguing: ‘For investors in chemicals companies, 2024 will in our view, by H2, develop into the type of year that the market had hoped for in 2023 – one of gradual volume recovery and improving profitability. Until recently starved of good news, investors may slowly warm on chemicals through 2024.’

In 2023 the FTSE 350 Chemicals sector fell 18.3% and year-to-date there has been little sign of recovery with a near-4% decline. Not all chemicals companies are created equal though and this article will look at the businesses which are shining and taking advantage of the opportunities provided by drivers like the energy transition and developments in the pharmaceuticals space. 

HOW DO CHEMICALS COMPANIES MAKE MONEY?

Companies in this sector take raw materials like oil, natural gas, air, water, metals and minerals and convert them into chemical compounds. The industry can be split into five sub-sectors – basic chemicals, specialty chemicals, agricultural chemicals, pharmaceuticals and consumer products.

Basic chemicals, produced in large quantities, are mainly sold within the chemical industry and to other industries before becoming products for the general consumer.

Specialty chemicals companies manufacture adhesives, sealants, water treatment chemicals, plastic additives, catalysts and coatings.

Agricultural chemicals companies manufacture nitrogenous or phosphatic fertiliser materials and pharmaceuticals companies manufacture compounds used in prescription drugs, vaccines, vitamins and over the counter drugs.

A lot of UK businesses in this sector are speciality chemicals firm which provides scope for them to achieve higher levels of profitability, generate decent amounts of cash and be less at the mercy of fluctuations in domestic, regional and global GDP.  Although their recent performance has not borne this potential out.

CHEMICALS COMPANIES PROFILED

Akzo Nobel (AKZA:AMS) €62.48

Market cap: €10.7 billion

Netherlands-based paints and coatings company Akzo Nobel’s (AKZA:AMS) performance coatings division manufactures paints and coatings for ships, cars, aircrafts and yachts. Its decorative paints divisions supply a range of products including paints and varnishes to household brand names like Dulux and Hammerite.

Analysts at Morgan Stanley are overweight in Akzo Nobel, they say: ‘We see few reasons for concern. Generally, investors tend to get concerned about Akzo/the coatings space when oil prices move higher, fearing inflation on the raw material basket, which is perhaps reminiscent of the 2016-18 period (where Akzo faced challenges to recoup raw material inflation).

‘However, it’s important to note that a part of the recent oil price strength has been a function of supply containment (by OPEC), and, even more importantly, raw material capacity utilisation rates are likely to remain supply-led through 2024 (on a moderate demand recovery).’

Croda International (CRDA) £47.16

Market cap: £6.6 billion

The FTSE 100 company primarily makes money through its life sciences and consumer care divisions by producing compounds used in everything from pharmaceuticals and sun protection to crop yields and seed enhancement.

Croda has expertise in lipid nanoparticles or LNPs, which are fatty molecules used in drugs and vaccines to encase and protect the stuff in the drugs and vaccines that help people. Substances like these are sometimes known as excipients. LNPs are crucial for mRNA treatments – like mRNA Covid-19 vaccines including the ones developed by Pfizer (PFE:NYSE) and Moderna (MRNA:NASDAQ).

It is a major supplier to the beauty care, home care, healthcare and industrial markets. Croda recently reported a disappointing set of full-year 2023 results impacted by continued destocking by customers and a weak trading environment.

The group operating margin for 2024 is expected to be two to three percentage points down on last year due to depressed sales volumes in two of its highest-volume businesses, crop protection and industrial specialties.

Croda has been a reliable source of dividends and has increased them every year for the past 32 years. It yields 2.4% and trades on a price-to-earnings ratio of 28.9 times.

Synthomer (SYNT) 243p

Market cap: £398 million

Year-to-date shares in this company have put an impressive performance gaining 34%. Despite reporting a much lower profit for 2023, the specialised polymers and ingredients supplier remains optimistic.

While profit fell in the adhesive solutions and health and performance materials divisions, other divisions like coatings and construction held up better.

Net debt was halved to £499.7 million, helped by a £276 million rights issue at 197p per share last October.

Canaccord Genuity analysts believe that Synthomer’s future performance will improve ‘once markets start to recover’.

Analyst Alex Brooks says: ‘We are moving numbers to the right, effectively pushing the recovery out by a year; we now expect nearly all the improvement in 2024 (estimated) to be self-help, with better figures coming next year.’

Brooks observes the wider chemicals industry looks ‘well set for a sustained recovery’.

Zotefoams (ZTF) 386p

Market cap: £186 million

The company reported a steady set of annual results on 19 March. Its products are used in everything from air conditioning units to the aircraft industry, cars, chips, electronics, healthcare, transport and sports and leisure equipment like cricket pads.  

Its main markets are footwear, where it has an exclusive agreement to supply Nike that was recently extended to 2029, product protection and transportation, which includes aviation and aerospace, automotive and rail.

Analysts at Singer observe: ‘Zotefoams should be a core small cap holding in our view. It is a unique business with sustainable long-term growth opportunities underpinned by high technical and sustainability credentials.

‘We expect further progress in full year 2024 an Olympic year, led by the start of a new design cycle at Nike which underpins growth in road running and training shoes.

‘ZoomX soles were introduced in basketball shoes (GT Cut 3) towards the end of full year marking first entry into this product category. Product reviews have been excellent. Trading has been very strong in Footwear year-to-date. We also think there is scope for significant additional volume by expanding with other well-known Nike basketball brands.’

Itaconix (ITX:AIM) 160p

Market cap: £21.4 million

US-based Itaconix (ITX) develops sustainable polymers from plant-based itaconic acid which are used in cleaning and hygiene, energy and industry, surface coatings and agriculture applications.

Although it has a small market valuation right now the company has plans to be a ‘$100 million and above company’ Itaconix’s CEO John Shaw told Shares recently.

It has ‘grabbed the attention’ of analysts at Canaccord after reporting 2023 results on 15 April.

The company reported a 40% increase in revenue to $7.9 million and posted year-end cash and investments of $10 million. Canaccord sees ‘a rapid return to growth going into 2025’.

HOW TO INVEST IN THE BROAD CHEMICALS SECTOR

An inexpensive way to gain exposure to the chemicals sector is through an ETF (exchange-traded fund).

Although there are no specific chemicals products to speak of listed in the UK there is iShares S&P 500 Materials Sector UCITS ETF USD (Acc) (IUMS) which encompasses the industry alongside mining, packaging, paper and construction materials.

Over the past year the product has returned 13%, over three years 28% and over five years 79% to investors.

The tracker’s largest holding is Linde (LIN:NASDAQ) – a global multinational chemical company founded in Germany in 1879. The company’s primary business is the manufacturing and distribution of atmospheric gases, including oxygen, nitrogen, argon, rare gases and process gases. The fund also holds Air Products and Chemicals whose principal business is the sale of gases and chemicals for industrial use. The ongoing charge is 0.15%.

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