A Not-So-Bad Year
2:02 PM MST | January 10, 2012 | By VINCENT VALK
In this week’s print issue, I reported on the moderately positive outlook for chemicals sector earnings. Most analysts agree that growth will slow for most companies, but they also agree that there will be growth – this isn’t 2008.
Europe is, unsurprisingly, a big factor in the outlook. “We would be more constructive on the group if greater clarity emerges with respect to Europe’s sovereign crisis, as well as global end market demand,” says Deutsche Bank analyst David Begleiter. But the U.S. industry is expected to see output growth, and the global industry has enough momentum to weather the European storm.
One funny thing that came up in these rather modestly optimistic (it is truly a year for neither bulls nor bears – what would be a slow-moving bull? A mountain goat, maybe?) reports is that chemicals stocks have fallen a bit further than the market as a whole. Deutsche Bank noted that the U.S. chemicals sector is trading at 10.6x forward earnings, 29% lower than the 15-year historical average. Chemical stocks in the S&P 500 were down about 4% for 2011 as of December 29 compared to an S&P 500 that was flat, according to Wells Fargo.
It wasn’t always thus in 2011, however. Wells Fargo notes that chemical stocks rose 15% in the first half, then fell 17% in the second, compared to up 7%, then down 7% for the entire S&P 500. Indeed, the first half of last year was quite positive, with a spate of good news including big M&A deals and (mostly thanks to shale gas) new construction projects. At the start of the year, ACC expected global chemicals demand to grow by 5.4%.
ACC now, of course, is forecasting demand growth of 3.5%. The U.S. debt ceiling crisis and S&P downgrade over the summer hit the stock market hard and chemical companies began to fret over falling demand in Europe and the possibility of a second recession on both sides of the Atlantic. There were moments in the late summer and early fall when it looked like the global economy was on the brink of another financial crisis. It was, as Wells Fargo analyst Frank Mitsch noted, “A Brooklyn Cyclone kind of year.”
I wouldn’t say the economy is out of the woods yet, but we do appear to have reached a kind of equilibrium. Companies and analysts have adjusted to the likelihood of a recession in Europe (albeit a mild one; all bets remain very much off if Europe goes into a tailspin, a possibility that I would not blithely dismiss), and the situation in the U.S. does not look as bad as feared. Though there’s been some fretting about the Chinese property market, emerging economies look pretty healthy. The year 2012 ought to, in the words of CW editor-in-chief Rob Westervelt, still be a growth story.
That the bottom is not falling out of the world economy is unabashedly good news. But job growth in the U.S. remains tepid, and the euro crisis remains unresolved. Last year didn’t turn out as good as expected – at the start of 2011, many forecasters were talking of a ‘V-shaped’ recovery, at least for the chemical industry. Economic forecasting is a notoriously iffy business, and while companies (and Republicans) may like to complain about the adverse impacts of regulatory uncertainty, economic uncertainty, and all kinds of uncertainty, I’d argue that, if you take a hard look at things, nothing was ever all that certain to begin with. This year is shaping up to look worse than it did six or eight months ago, but better than it did two or three months ago. But we’ll only really know what it looks like when it’s over.