Petrochemicals – No Longer a Fair Fight
Early in Q1 2018 (at a different company) we wrote a provocative piece that had as its core conclusion that investors should walk away from basic chemicals and that companies should immediately start looking at “lifesaving” consolidation opportunities. This flew in the face of massive US Gulf coast investments coming on stream at the time and some very attractive industry profitability. At the time our logic was that “peak oil” or “peak gasoline” would drive investments from oil producers and refiners to produce more chemicals in order to maintain demand for hydrocarbons. We saw this as a grave 2022-2030 risk to traditional industry participants who were not back-integrated into hydrocarbons.
In the last couple of years, we have seen zero consolidation in basic chemicals, despite a few rumors and a very public courtship of Braskem by LyondellBasell. What we have seen is a collapse in margins and a wholesale rejection of the sector by investors, as illustrated in the chart below. Much as we would like to think that our research influenced investor behavior, we are sure that the margin compression (real and anticipated) was the true story.