While most chemical industry companies and business leaders were anticipating improvements by 2023, it has proved to be a challenging quarter for most companies, leading into a challenging year. In this episode of The Chemical Show, host Victoria Meyer explores why many companies are lowering full-year earnings outlooks and what’s driving current market conditions. 

 

Learn more about the following in this episode:

• Insights from 2Q23 chemical industry earnings reports
• Worst period of chemical inventory destocking since 2008-9
• Effect of sluggish economies in Europe and China
• Inflationary effects – slowing demand for consumer goods
• Strategies companies are using to respond to challenging market conditions

Join Victoria as she digs into the second quarter 2023 earnings reports, analyzing the challenges faced by chemical companies and searching for valuable insights. Victoria shares indicators for improvement on the horizon, the possibilities of a period of flat demand before a significant increase, as well as the expected inventory restocking.

 

Please subscribe to The Chemical Show on your favorite podcast player. And, visit www.thechemicalshow.com to subscribe to our email list and get additional insights.

Additional links:

2Q23 Earnings Reports:

Huntsman  , Stepan   Eastman    Shell    BASF    Lanxess    Chemours    Phillips 66     ExxonMobil

Listen to Victoria Talk About the 2Q23 Earnings Here:

Watch the Victoria Discuss 2Q23 on Youtube Here:

Unpacking 2Q23 Chemical Earnings: Sluggish Economies, Inventory Destocking, and Future Outlooks

Hi, this is Victoria Meyer, welcome back to The Chemical Show. In this episode, I am going to be discussing themes and learnings from our Q2 2023 earnings reports. We are in earning season, and it’s not really a great season this year, as companies are reporting out on their 2nd quarter and their overall first half of 2023 earnings reports. Most of our public companies have been reporting over the last couple of weeks. I’m going to be referencing some insights gained from some of the companies that I’ve followed and reviewed their earnings reports this year including Huntsman, Stepan, Eastman, Shell, BASF, Lanxess, Phillips 66, which of course is where CPChem shows up, as well as ExxonMobil.

We hear what’s public, and yet there are many more chemical companies that are private and are not reporting earnings, but I also get insights from discussions with leaders in those companies, and I’m bringing that into the podcast today. So what I really want to do is focus not just on the outcomes in the reports of what we’re hearing, but also what some of those insights are and how these chemical companies and leaders are approaching some of the challenging market conditions that we’re in.

Here’s my short summary of what chemical companies are saying right now:

It’s been challenging. That is the number one thing I’m hearing across the board. Q2 of 2023 was a challenging quarter for most chemical companies, leading into a challenging year. If we go back to the beginning of the year, most companies and business leaders were anticipating improvements by the second half of 2023. Unfortunately, that does not seem to be what’s gonna manifest. And in fact, at this moment in time and as companies have been reporting earnings, many companies have also been lowering their full year earnings outlooks. BASF, Lanxess, and, LyondellBasell are indicating a downward trend.

 

Main Drivers

1. Continued destocking

In fact, it was the CEO of Huntsman who talked about this being the worst destocking since 2008 and 2009. Again, some markets are hit harder than others. I think we’ve seen that. There’s certainly variability, but what we’re seeing is continued destocking. Some green shoots, I’ve seen that reference. This may be our theme of the moment. Green shoots, as in some markets are showing better life than others, but at best flat, and in the end of some inventory destocking. At worst, there’s some continued destocking going on because customers in certain markets had built up inventories. Certainly what we’re seeing here and what they’re talking about is a flattening demand curve.

My mental model is, I think we’re maybe at the bottom of this curve, but we’re in for a little bit of a flat period before we start really seeing demand increase and we start seeing inventory restocking occur. It probably won’t occur at the level that we saw in 2020 and 2021, when companies were really struggling to get inventory and so they were holding a lot more safety stock. Now they’re working their way through what turned out to be an excess inventory by far.

 

2. Sluggish economies

Particularly in Europe and China. So Europe is really continuing to feel the effect of the Russia-Ukraine war. The impact that it’s having on energy, the impact that it’s having on demand, and the inflationary effects. Europe is challenged. I think we’re seeing this across the board. What’s especially hard is, Germany is where a lot of our chemical industry is concentrated in Europe, and Germany is seeing crazy high prices for energy. Along with, continued calls for some caps on their electricity and other energy prices because they had a significant dependency on Russia and other gas. We’re seeing with both the combination of the Russia-Ukraine war as well as some of the changes implemented due to sustainability goals for the EU. This is having a pretty significant effect on the European economies, and their energy prices and overall demand impact.

China is still sluggish. I talked about that a couple weeks ago. Their efforts to kick start their economy are not taking positive effect. They’re struggling to figure out how to rebuild demand. Of course, in this globally connected world we’re in, it is of no surprise.

 

3. Increased production

This is particularly in polyethylene and polypropylene. So John Richardson, whom you guys have heard many times on The Chemical Show, most recently in episode 102. If you haven’t listened, go listen to it. He really has talked about overcapacity as well as the simultaneous demand decrease in polyolefins, driven by China, driven by this lack of consumer demand, and a number of other factors.

Lyondell Basell’s CEO, Ken Lane, also stated that he does not see any improvement until the second half of 2024 in terms of true demand improvement, and supply-demand balance improvement. This is largely due to continued increasing production in polyolefins. We’re seeing it. We’ve got plants starting up. Shell’s plant’s gonna hopefully start again, this year, continuing production and investment in the industry. So we’re in a period of oversupply, which is having a knock on effect on earnings.

 

4. Inflationary effects

We’re seeing this across the board. This is slowing demand for consumer goods. You and I are seeing it personally. Our companies are seeing it. This is really the effects of inflation and it’s the effects of consumer behavior changes. Less purchase of goods and more purchase of services, travel and other things when people can afford to do it, because citizens of the world, not just Americans, Europeans, Asians, everyone is feeling the impact of inflationary times and the greater cost of goods and services.

What’s clear to me, and what’s clear to you probably, is that some markets have gotten hit harder than others. There’s definitely more variability in sector results than we often see. As I’ve traversed through a number of different earnings reports, it’s noticeable that this business is our bright and shining star, and this other business, not so much.

We’re seeing a lot more variability in results than what we typically see, this reflects the general economy, less buying of goods, more buying of services and travel, and also just shifting. Shifting demand patterns of what people are spending money on and what companies and businesses are spending their money on. Along with some bright shiny spots that end up falling into green and sustainable products serving green energy, serving the sustainability trends that we’re seeing.

 

What can we learn about approaches in success?

What I would say is, it’s not been a glowing earning season, but there have been some bright spots. Actually, as we look at these reports, as we look at what leaders are saying, as I listen to what others in the industry are saying about how they’re approaching, their business and their markets today, and how they’re finding success.

 

Control what we can control.

So consistent messages across the board about cost control, price discipline, and working capital management. One of the things that comes through loud and clear from Eastman is their cash focus. In fact, what I find interesting is that they’ve actually had a 50% increase in cash generation from Q1 into Q2. So the Q2 cash generation results exceeded Q1 by 50%. What is this about? Cost control, price discipline, working capital management.

Their CEO is one of the guys that have said we are focused on controlling what we can control. Also getting really clear on working capital, getting clear on margin management, getting clear on cost control and price discipline is critical.

One of the speakers of the upcoming Chemical Summit, is talking specifically about how companies are and can be using data analytics and predictive data analytics for better margin management, and how getting smarter and more disciplined with that data ends up resulting in better margin management. Got some great case studies coming in, and some great insights that I think you’re gonna love. So that’s gonna be at the Chemical Summit in October.

Back to what else can we learn about approaches, that companies are finding successful.

 

Customer centricity.

Customer centricity is one of the things I’m going to be talking about over the next couple of weeks and this is really about recognizing the real innate value of customers and what customers themselves really value. So customer lifetime value, how customers rank you, and what they see as critically important and delivering it.

It enables you to realize greater value from premium customers. Again, I’m going back to Eastman. They referenced specifically in their earnings report, “We continue to benefit from momentum in our premium products and markets.” Interwoven is this recognition that certain markets and certain customers are your premium customers. You can create greater value both from a customer longevity, from a willingness to pay more, from a rightsizing of your business, by understanding who is willing to commit to you? Who is willing to pay an appropriate price? Not necessarily a bigger price, but certainly an appropriate value matching price is critical. Supported by commercial excellence, supported by customer centricity.

That’s one of the key things that we can learn. I certainly hear this from leaders in the industry who are winning and having great quarters and a great year in their business because they are really being customer centric, customer disciplined, and working together to achieve that value. So that’s something that we can learn and take away from those earnings reports this quarter.

 

The value of diversification.

I alluded to this earlier, what is coming through loud and clear is the value of having diversified markets, diversified geographically, and diversified product and end use. What we are seeing is that some markets are doing better than others. You guys are feeling it. I know my clients that I talk with and the companies I talk to on The Chemical Show are feeling it, there is a value in diversification. Chemours is one company, where some of their businesses have had record quarters, which is carrying the weight of the businesses that are not having record quarters. So there is value in diversification.

I think the other thing is, and we see this from LyondellBasell, this warning that markets are not gonna improve until the second half of 2024. They’re also very heavily weighted in plastics and that plastics effect, polyethylene, polypropylene, the oversupply coming on those markets is impacting their business. It can’t help but do so. So there’s always pros and cons, but what I think we’re certainly seeing now in these challenging markets is the value of a diversification strategy.

 

It’s the story.

I’ve talked before about the critical importance of storytelling and that the data is not enough. It’s the story that you use to tell the data that is critical. When we look at these earning reports, some companies are doing amazingly well at it. They’re understanding the story that they need to tell, articulating it, making their case. and they’re being supported by their investors. Some companies are going a little bit over the top. There was one company, who’s gonna remain nameless, that felt like a pitch book. It was almost too glowing, although the results didn’t deserve to be glowing. So it was really the odd dynamic reading this, and actually, when I started reading their earnings report, I thought, is this actually their earnings report? Is this a press release about something else?

Oh, no, it was their earnings report. Nonetheless, the value of storytelling. How you weave in your stories about the whys, how you weave in the stories about your customers, how you are narrating your results and the data that supports your results to get the outcomes that you want to paint the picture is critical. That’s where can see, there are some winners and losers.

What is your company doing to be successful in the current environment? Where do they fall on the spectrum of control what we can control, customer centricity, valuing diversification, or just storytelling and managing the narrative to investors to customers to business partners? I wanna hear from you, so shoot me a message on LinkedIn. It’s probably the best way to get a hold of me, and I’d love to hear that story.

In the meantime, don’t forget about The Chemical Summit. The 1st annual Chemical Summit is coming up on October 24th and 25th in the Woodlands, Texas. We’ve got a number of great topics and speakers on the docket, but one of the topics we’re talking about is an economic outlook for 2024 and beyond, and its impact on the chemical industry. And therefore, what can you do with that? So there is gonna be some great insights and learnings at the chemical summit. I hope to see you there. If you haven’t registered yet, there’s still some spots, head on over to thechemicalsummit.com to reserve your seat, and I am looking forward to seeing you there.

That’s it for The Chemical Show today. Thank you for reading, following and sharing. If you haven’t yet left a rating or review, get out there and do it, that really helps. I am looking forward to talking to you again soon.