Key Takeaways
- European chemical stocks are benefiting from higher demand amid supply disruptions for their Asian rivals.
- The Iran war has weighed on output from the Middle East and Asia, boosting European firms’ pricing power.
- While there are undervalued stocks in the sector, the long-term outlook depends on the duration of disruption in the Strait of Hormuz, with higher energy costs likely to weigh on the sector.
The Iran war has sparked a surprise rally for European chemical stocks, as production disruptions across the Middle East and Asia have turned into a competitive advantage. Tighter supplies from the Middle East, a global hub for commodity chemicals, have raised demand for certain products from Europe, while disruptions to Asian peers’ output have boosted European firms’ pricing power.
“A lot of production capacity in the Middle East will remain offline over the near-term as liquid natural gas production, the feedstock for the building blocks ethylene and propylene, remains down,” says Morningstar senior equity analyst Seth Goldstein.
The closure of the Strait of Hormuz and acute supply shortages have triggered more than 40 force majeures since the start of the war, predominantly in Asia, leading to a significant widening of spreads, or differences in pricing between regions.
That has been a boost for some European chemical firms. Shares of Evonik EVK are up around 31% so far this year, while those for BASF BAS, Arkema AKE and Brenntag BNR are all around 20% higher on improved earnings expectations. This follows a challenging period for the sector—the Morningstar Developed Markets Europe Chemicals Index underperformed the broader market in the past 12 months, declining about 3% in euro terms.
“Asian suppliers are experiencing increased disruptions and supply problems due to the current situation,” says Sabrina Reeh, senior portfolio manager at DWS. “This allows European chemical companies to raise their prices more significantly, in some areas quite considerably.”
European Chemical Stocks Benefit from Disruption to Asian Rivals
Citi analysts highlight German chemical behemoths BASF and Evonik as “potential beneficiaries” from the disruption, adding that April pricing trends will be “critical” in determining whether Asian supply issues translate into improved net pricing in Europe.
BASF could gain from Asian supply constraints, in turn supporting “upstream margins and improving European utilization,” the analysts note. The firm has already announced price hikes of up to 30% across its home care, industrial, and institutional cleaning products.
“The market, in our view, underestimates the magnitude of the earnings tailwind likely to result from higher spreads driven by supply distortions following the closure of the Strait of Hormuz,” Citi analyst Sebastian Satz says of BASF. “Strong 2Q performance should mark a long‑awaited earnings inflection.”
The analyst notes Evonik for its “overly cheap valuation” and “attractive risk/reward profile,” adding that the stock could benefit from Asian feedstock shortages in methionine, an essential amino acid, and substantial spread increases in Asian butadiene, used to make rubber.
Air Liquide Al, a key supplier of helium for semiconductor and healthcare products among others, is also likely to benefit from higher pricing, according to Morningstar equity analyst Krzysztof Smalec. Elsewhere, German chemicals distributor Brenntag could take advantage of “arbitrage opportunities” if pricing differences across key regions persist, Michael Schaefer, senior equity research analyst at Oddo BHF, says.
Uncertainty Remains Over the Long-Term Outlook
Analysts nevertheless caution that the extent of the boost for European chemicals stocks will depend on the duration of the disruption to the Strait of Hormuz and rival producers. BASF’s first-quarter earnings on April 30 will give a first look at the impact of the war on Europe’s chemical firms and wider pressures on the sector.
“Price-elasticity of demand across respective regions is still the great unknown in the current conflict,” Oddo BHF’s Schaefer says. “The longer the conflict lasts, the lower the level of import pressure in Europe from Asian producers.”
Chemical Stocks Face Major Global Risks
Indeed, a prolonged conflict could prompt some importers to reassess vulnerable supply chains in Europe’s favor, according to Reeh. “Customers might then be more willing to pay a higher price if it meant greater security of supply. In the long term, this would have a positive ripple effect for European producers.”
Still, questions remain over the wider fallout of the war, with a protracted conflict, persistently high energy prices and suppressed global growth likely to weigh on the competitiveness of Europe’s energy-intensive chemical stocks over the long run.
“It remains unclear to what extent the Middle East turmoil will translate into broad‑based gains for European diversified chemical companies, and stagflation risks cannot be ignored if the Strait of Hormuz will remain closed for a prolonged period,” Citi notes.
