I. Sector Landscape and outlook

Speciality chemicals are considered to be the building blocks of many end-user products and applications in diverse areas like Pharmaceuticals, Personal care, Home Care, Agro Chemicals, Automobile parts and many others.There is a wide range of speciality chemicals catering to a number of sectors and industries globally, and a variety of these speciality chemicals includes agrochemicals, cleaning materials, cosmetic additives, polymers additives, food additives, fragrances, lubricants, surfactants, textile auxiliaries. In the current set of COVID-19 environment, Specialty Chemicals space has taken a hit given the issues circling around production and demand etc. but certain players with exposure to particular pockets still appear to be providing an edge.

Few companies which are engaged in manufacturing of speciality chemicals often help their clientele to come-up with innovative individual technical solutions with regards to their products. Also, speciality chemicals are not produced in bulk like other chemicals because of very limited uses of these chemicals to influence the effect of their customer products and largely developed based on job work. Speciality chemical could be a single chemical or a set of formulations where the product mix significantly amplifies the effect of end product.

Global Speciality Chemicals Market 

In 2018, the global speciality chemical market size stood at US$ 211.2 billion and the same has been expected to grow with a CAGR of 5.2% to reach US$ 316.8 billion market size by 2026 according to a market research report released in December 2019.

Fig 1: Specialty Chemical Market Size (in US$ billion)


Source: Allied Market Research

During the year 2018, the world's five biggest speciality chemicals segments were speciality polymers, industrial and institutional cleaners, electronic chemicals, surfactants, and flavours and fragrance. These segments commanded a market share of 37% and the top ten largest segments accounted for 63% of total annual speciality chemicals sales. In 2018, China was the biggest consumer of antioxidants, construction, feed additives, printed circuit board, semiconductor packaging, plastics additives, paper chemicals, rubber-processing chemicals, speciality coatings, speciality polymers, textile chemicals, and water management chemicals. Chinese consumption for these afore mentioned chemicals accounted for 30%-50% of global consumption.

Further, during the same year North America was the major consumer of speciality chemicals including food additives, biocides, catalysts, corrosion inhibitors, cosmetic, industrial and institutional cleaners, lubricating oil additives, synthetic, oil field chemicals, printing inks, surfactants, and lubricant. While Western Europe was the leading consumer of flavours and fragrances and nutraceuticals. Japan recorded the highest demand for  imaging chemicals in 2018. Meanwhile, other Asian countries recorded highest demand for chemicals used in semiconductor fabrication.

UK Market 

The chemical industry is the second-largest manufacturing sector in Great Britain after food, beverages, and tobacco processing sector, with a turnover of €62.9 billion in 2018 and accounted for ~11 per cent of the value added by the whole of the UK manufacturing space. At one point of time, British Chemical industry was a world leader.

The UK chemical sector accounted for £19.2 billion of the UK economy’s Gross Values Added (GVA) and employed about 153,000 workforces in 2018 and half a million more those whose job indirectly linked to the chemical industry. The UK chemicals and chemical products exports accounted for 12.7% of its total goods and services exported by value in 2018. However, the total chemicals exported in 2018 stood at US$ 62.67bn whereas imports stood at US$ 64.4 bn, which implies that the UK is a net importer of chemicals.

The UK chemicals sector is highly diverse, especially with regards to the manufacturing of commodity chemicals, speciality chemicals, polymers (plastics) and consumer chemicals (like personal care and cleaning products). The sector targets high-value and growing markets, like Pharma & healthcare services, agriculture, and other niche markets that are not catered to by low-cost economies like China, and the Middle East. Britain has a competitive advantage in innovative and high-value products due to its solid R&D base.
 

 
With this understanding, let us now look at some of the key players in this sector. 

Key Players in Listed Space 

In the UK, there are 15 speciality chemical companies listed on the stock exchange with a combined market capitalisation of £13.72bn, with Croda International PLC being the largest speciality chemical company with a market capitalisation of   ~ £ 6.0 billion; while , Johnson Matthey PLC is the largest company in terms of revenue. 

Fig 4: UK Speciality Chemical Companies’ Ranks by Market-Cap (£million)


Source: Thomson Reuters
 
Fig 5: UK Speciality Chemical Companies ranked by Revenue (FY19, £ million) 


Source: Thomson Reuters

Let us now turn our focus towards the growth drivers for this sector.

Industry growth catalyst
 

1. Demand spurt for speciality chemicals in Pharmaceutical industry: Increasing innovation and new product development in the global healthcare market is set to drive demand for speciality chemicals to enable customers to come up with more sophisticated medicines and formulations. Also, pharmaceutical sector is one of the biggest customers of the UK speciality chemical manufacturers. Looking at the boost to Healthcare space amid the Coronavirus-driven scenario, the specialty chemicals sector seems to be changing the course in terms of outlook.

2. Increasing demand for speciality chemicals in Personal, Homecare space and other FMCG space: With the consistent evolvement in the global income level, the demand surge for personal and homecare is quite obvious, especially in densely populated several Asia-Pacific countries. As speciality chemical plays in vital role in this space which provide and unique effect to its customer’s offerings, the demand for speciality chemical is set to drive in next few years. Also, in consumer staple space speciality chemicals act as crucial ingredients for the various end products. Therefore, we believe these will benefit speciality chemicals players in future.

3. Emerging demand for speciality chemicals in the Asia Pacific market: Speciality chemicals have experienced a demand glut in the Asia-Pacific region as compared to American and European countries. Paints and coatings dominated the speciality chemicals market in Asia Pacific region and are expected to grow significantly in next five years with stalwart growth in the construction industry, primarily led by  growth in residential construction market across the region.

4. Increasing renovation and construction work in North America and Europe:  In the recent times, North America registered a decent growth in renovation work and recuperation in construction activities particularly in West Europe are set to drive demand for speciality chemicals in next few years.

5. Increasing industrial construction in the Middle East and African region:Industrial and institutional construction in Middle East countries primarily in Saudi Arabia, the UAE, and Qatar has recorded an uptick in recent times as these oil based economies are trying to diversify their  dependency from oil to  tourism, healthcare, and manufacturing industries, which have witnessed significant demand for speciality chemicals like construction chemicals, cleaning materials, surfactants, textile auxiliaries and others over there, and the demand is expected to further increase as oil has become quite volatile to bet for economic viability.

6. Lower Crude Oil Prices: A fall in crude oil prices is usually seen as a positive for the sector, considering petrochemical prices act as a proxy to crude oil prices. If oil prices sustain at the current level, it will lead to bringing down the cost of production for speciality chemical manufacturers.
 

Time to address the prevailing scenario - COVID-19. 

A Mix Impact of COVID-19 on Chemical Industry 

A sudden drop in demand from few segments has put the industry into oversupply kind of situation, especially the automotive and transportation sectors are among the hardest hit end-markets, with demand for chemicals falling by up to 30%.

Though on the other side, demand for pharmaceuticals, food additives, and disinfectants is peaking, and chemical companies exposed to these sectors are reporting record outbound volumes amid increasing spread of coronavirus cases. UK's most of the speciality chemical players’ major customers are pharma companies. This has restricted downside in few of such companies to an extent against the free fall as seen in the overall chemical space.  
 
 
II. Investment Theme and Stocks under Discussion (VCT, SYNT, TET and SCPA) 

Having understood the industry dynamics, let’s now look at 4 stocks that appear to be attractive in the current situation.To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).
 
 Fig 6: Relative performance of the stocks under discussion against FTSE ALL Share Index (YTD)