1. UK Chemical Sector Market Landscape

The products and services of the chemical industry are essential to everyday life that ensures things from clean water, food to medicines. The chemical sector has contributed positively to fight against covid-19, where the chemical products are used for making ethanol for hand sanitisers, disinfectants, and critical raw materials for paracetamol, insulin and other medications. As per the United Nations Global Chemicals Outlook, the global chemicals production and consumption are expected to reach a size of close to USD 10 trillion by 2030. The key goal of the government’s across the globe is to reduce the adverse impacts of chemicals and waste.

The chemical industry revenue in the UK was €62.8 billion in 2019. The chemical sectors’ contribution was £14 billion in annual value added to the UK economy. The chemical industry in the UK is expected to grow at a CAGR of around 1.9% between 2019 and 2025, as per whatech. The chemical sector of the UK is very diverse, and it is very critical for the economy, including the manufacture of commodity/ bulk chemicals speciality chemicals, polymers, and consumer chemicals. The chemical sector in the UK includes small and medium enterprises and microbusinesses, which make more than 90% of the sector, and it has a handful of multinational companies.

Geographical clustering is important as companies can be located close to both suppliers of their feedstocks and end-users of their outputs, as well as a large number of support services (engineering, R&D, electricity, effluent treatment) required. The chemical sector of the UK has created significant job opportunities, and it has attracted huge investments. The UK has a competitive advantage in innovative and high-value products due to its strong research & development base.

Categorization of Chemicals

• Petrochemicals and Basic Inorganics are bulk commodities used in chemical sub-sectors downstream.
• Polymers and Consumer Chemicals are supplied to high-value sectors such as aerospace, automotive and pharmaceuticals.
• Specialty Chemicals are high-value and supply growing downstream markets, e.g. healthcare, services, agriculture, and niche markets that are not catered for by low-cost economies.

 Key Trends in the Chemical Sector

• Innovation – The smart decisions such as where to invest and how to use the technology in the most effective way will be important along with a focus on products, processes and services. The chemical sector will incorporate the technology into larger goals of the organization, which will support the transformation.
• Data-driven Micro Segment Business Model – This is not very common for chemical companies that are used to big volumes and large customers. The companies need to be clear about how volatility is impacting the business and balance sheet. The companies will use more advanced predictive pricing and market models to observe how the costs are changing and the risks related to the value chain from upstream to downstream.
• Sustainability as a Growth Opportunity – This includes reducing the emissions & own footprints, and the chemical companies need to assess their indirect effect on the environment. The chemical sector generates growth and revenue, and it can have a business model where it can share the responsibility as well as impact benefits. It can focus on innovation that can improve the reuse and recycling of plastics.

Risk Exposures to the Chemical Sector

• Environmental Impact – The failure to adopt or apply ethical standards and environmental compliance can contribute to climate change. The chemical industry is already one of the most regulated industries, and the regulatory environment is becoming more complex. It requires a constant audit of the chemical manufacturing facilities.
• Health & Safety – The sector uses and manufactures hazardous chemicals and any mishandling, leakage or accident can lead to injury or death at the chemical manufacturing plant. There needs to be a proper supply chain integration, and stringent safety measures need to be put in place to prevent
• Government Regulations – Changes in regulations in the chemical industry can affect the business environment. The regulatory norms drafted by the government keeps on changing, and thus, it is important to work in line with the regulations set by the government, and it could result in additional cost. In any event, where the chemical sector is unable to adhere with the government laws, hefty fines could be imposed.

Benchmark Index Performance

Based on the 1-Year performance, the FTSE 350 Chemicals index has generated a positive return of around 17.17% and has outperformed the FTSE 100, FTSE 250, and FTSE All-Share indices with price return of nearly -7.52%, -3.63%, and -6.18%, respectively.

Fig 1: One Year Benchmark Index Performance

(Source: Refinitiv, Thomson Reuters; chart created by Kalkine Group)

SWOT Analysis

Chemical Sector Outlook

The covid-19 has impacted the chemical industry globally, and thus the chemical demand has declined. The slowdown in the industrial activity has severely impacted the chemical demand. In order to overcome the impact of the pandemic, the chemical sector has undergone asset optimization, cost management and operational efficiency. The strategic initiatives such as research & development and technology will shape the outlook of the chemical sector in 2021. The chemical industry in the UK is expected to grow at a CAGR of around 1.9% between 2019 and 2025, as per whatech. Brexit is likely to have a significant impact on the business environment as it might lead to uncertainty in investments and it can cause trade disruptions.

The chemical sector needs to have short-term and long-term focused efforts, which will require initiatives on research & development and technology front. Some of the segments of the chemical sector adapted well to the economic challenges of the pandemic.

The chemical sector is crucial in enabling a future hydrogen economy, and supporting battery technology and related materials to drive electric vehicle production. The UK is framing a chemical strategy where science and innovation will be at the heart of the strategy, and the experts believe that the government should seek maximum cooperation and consistency with EU chemicals policy 2030 and the EU Green Deal.

2. Investment analysis and stocks under discussion (CRDA, ZTF, JMAT, VCT)

After gaining insights into the chemicals sector, we would look at the business model of four chemicals players listed on the London Stock Exchange.

A. Croda International PLC (LON: CRDA)

(Recommendation: Buy, Potential Upside: 10.43%, Market Capitalization: GBP 9.03 billion)

Croda International is a UK based specialty chemicals company focusing on high-performance ingredients and technologies. It is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 10.43% over the closing price of GBX 6,580.00 (as on 26 January 2021).

B. Zotefoams PLC (LON: ZTF)

(Recommendation: Speculative Buy, Potential Upside: 28.06%, Market Capitalization: GBP 200.08 million)

Zotefoams is the market leader of cellular materials technology industry focused on the optimal material solution. The Company is headquartered in Croydon, UK. ZTF is listed on the FTSE All-Share index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 28.06% over the closing price of GBX 399.00 (as on 26 January 2021).

C. Johnson Matthey PLC (LON: JMAT)

(Recommendation: Hold, Potential Upside: 7.63%, Market Capitalization: GBP 5.60 billion)

Johnson Matthey is a UK based multinational company focused on trading of specialist chemicals. The Company is operating across four segments – Health, Clear Air, Natural Resources and New Markets. The Company is listed on the FTSE 100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 7.63% over the closing price of GBX 3,003.00 (as on 26 January 2021).

D. Victrex PLC (LON: VCT)

(Recommendation: Hold, Potential Upside: 6.65%, Market Capitalization: GBP 2.09 billion)

Victrex is a leading UK-based holding company which is engaged in the manufacture and sale of various kind of polymers, with around 40 years of experience. The Company is listed on the FTSE-250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 6.65% over the closing price of GBX 2,426.00 (as on 26 January 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy/Speculative Buy" recommendation is also valid for the current price as covered in the report as on 27 January 2021.

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