Chemicals firms convert raw materials into many thousands of different products, serving a broad range of consumer, industrial and manufacturing purposes.
The biggest three chemical companies in the world are German-based BASF, US-based Dow Chemical and China´s Sinopec. Dow is currently in the process of completing a $142bn merger with US rival DuPont.
In 2001, Dow purchased Union Carbide, the company behind the infamous pesticide plant in India that leaked a chemical cloud which killed thousands of people 17 years earlier.
The chemicals industry can be broken down into three main product areas: basic chemicals, speciality chemicals and consumer chemicals.
Speciality chemicals have applications in areas such as pharmaceuticals, paints and electronics. Basic chemicals and plastics are found virtually everywhere, from plastic water bottles to children´s toys. Consumer chemicals include those used in the cleaning products sold in supermarkets.
What affects chemicals share prices?
The chemicals sector benefits from accelerating economic growth and tends to suffer when activity slows.
As chemicals are essential for the production of so many products used in everyday life, it´s a fair bet for investors during difficult times that aggregate demand for chemicals will eventually pick up again.
All segments of the chemicals sector tend to be positively correlated with the stock market; chemical shares therefore tend to rise during bull markets and fall in bear markets.
During the bear market of 2008/2009, the Dow Jones US Chemicals index fell by around 60%. It has since risen by about 335%. More recently, the US chemicals sector rallied on Donald Trump´s win in the US presidential election owing to expectations that the new administration would seek to cut taxes and increase spending.
The capital-intensive nature of the chemicals sector means that it can become acutely undervalued when economic growth slows. This characteristic makes such stocks attractive to value investors.
Running world class laboratories means research and development costs are significant. The high fixed costs of operating sophisticated facilities make chemicals companies sensitive to falling sales. On the flip side, the chemicals sector´s capital-intensive trait poses a notable barrier to entry.
What can make a company´s share price fall?
US-listed chemicals behemoth DuPont has proven to be relatively sensitive to the changing macroeconomic environment. This is also reflected in its elevated beta of 1.72. While it has a positive correlation with the stock market, tending to rise in bull markets and fall in bear markets, the beta tells us that DuPont is about 70% more volatile than the average stock.