⚗️ CHEMICALS: MARGINS ⚗️

⚗️ CHEMICALS: MARGINS ⚗️

One of the industries with the lowest performance last year was the chemical industry. The stagnation in the industry is mainly explained by five factors: high energy prices, excess capacity following the pandemic, high interest rates that have slowed the economic cycle, a lack of innovation that has become a commodity, and changes in global supply chains. In fact, some of this can also explain the downside of some other sectors.

The chemical industry has never been characterized by exponential growth; however, the situation could improve in the coming years. If the United States, Russia, and China normalize their foreign relations and move toward a new tripolar world, stabilizing the supply chain could bring certainty to production. Furthermore, if the world is transitioning to a new imperialist era, wars will continue, and the chemical sector cannot be ignored and must innovate.

In addition to the above, a prompt reduction in interest rates is expected. This implies a lower cost of capital and a boost to the economic cycle. Furthermore, if a wave of competition spreads across the world, the United States needs to demonstrate its superiority over other empires (such as China or Russia) so that engineering and chemical industries could experience a new positive trend.

The chart shows the top 10 companies in the sector. There is a strong correlation between a good gross margin and ROCE (return on capital employed), but these factors only explain about 38% of the causal relationship. Perhaps the most important thing is not to single out the best-performing companies, but also to ask: Could other companies have a better risk-reward ratio in the coming years despite their losses?

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J. Joel Padilla

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