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Until recently, differences in TSR across regions and subsectors followed a predictable pattern. Among all regions, chemical suppliers in emerging markets have the highest returns, while agrochemicals and fertilizers have the highest returns in all industries. But in the last five years, things have changed. Although there are still some emerging market companies whose five-year TSR is close to or more than 30%, there are also quite a number of emerging market companies whose five-year TSR is negative. As a result, the five-year average TSR of emerging market chemical companies is only 2%; only Japan’s average (- 8%) is worse. (there are many reasons for Japan’s poor performance in chemicals, many of which are described in this report. Due to the strong performance of Japanese stock market, the sub standard performance of TSR in 2013 weakened. ）The average five-year TSR of chemical enterprises in Europe and North America is much higher: 7% and 4% respectively.
What has led to the decline in the performance of chemical companies in emerging markets? First, in Asia Pacific and Latin America, the chemical industry is relatively young. Although 40% of global chemical sales come from emerging markets, the market value of emerging market chemical companies accounts for only about one fifth of the global chemical industry. There are several reasons for this. First, many chemical suppliers in emerging markets are subsidiaries of state-owned enterprises, many of which are concentrated in local or regional markets. Secondly, chemical enterprises in emerging markets tend to focus on the segmentation of basic chemicals and basic plastics. When the demand in these areas cools, they are vulnerable to impact. We expect that all of these factors will change in the next 10 years, with participants in Asia Pacific and Latin America becoming stronger competitors. But at present, the structure and business model of chemical enterprises in these areas are not mature, which makes them in a disadvantageous position.
In contrast, the environment has become more favorable for North American chemical suppliers, especially with the rise of shale gas as a resource. Shale gas, as a ready-made low-cost raw material, will make the whole North American chemical industry more competitive. So far, most of the benefits of shale gas have been obtained by petrochemical departments of comprehensive oil companies, which are not included in this survey. But the benefits will eventually extend to many of the more than 20 North American companies on our list.
Europe is the region with the strongest chemical TSR. This may be because there are a lot of multi professional companies there. Such companies were once among the worst performing in the chemical industry. However, since 2012, the average TSR of multi specialty chemical producers has increased significantly. Investors seem to be watching three developments that could have a positive impact. One is Arkema’s divestiture of its ethylene products business and Rockwood’s divestiture of its titanium dioxide business. These divestitures show that European companies are very disciplined in divesting businesses with disappointing profits. Another reason is the trend of multi-disciplinary cooperation: the merger of Rhodia Solvay and clariant-s ü d-chemie has encouraged the expectation of further integration. The third development trend is the possibility of overseas M & A: for example, Chinese investors have taken action to acquire the equity of foreign multi-disciplinary companies or directly acquire them.
However, at the macro level, the biggest change in the chemical industry may be the disappearance of dominant themes and advantages related to the huge global trend. Shale gas can be said to be an exception, because in the long run, this change will benefit North American companies. But in the foreseeable future, from the perspective of TSR, the most important thing is the business system of each company, no matter which region or sub industry they operate in.