Europe’s materials industry emerged as the continent’s biggest underperformer this earnings season. It’s not likely to get better anytime soon.
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(Bloomberg) — Europe’s materials industry emerged as the continent’s biggest underperformer this earnings season. It’s not likely to get better anytime soon.
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A basket of essential companies that supply products like plastic, aluminum, and paper — not your typical household names — reported the highest level of earnings misses so far this season. More than 65% of the MSCI Europe materials index missed earnings per share estimates for the fourth quarter, compared with just 35% of misses in the overall index, data compiled by Bloomberg shows.
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The sector, which includes companies like paint-maker Akzo Nobel NV, fertilizer producer Yara International ASA and flavorings manufacturer Symrise AG, is dragged down by weak demand in China, where economic woes have led to a slowdown in construction activity, and the threat of US tariffs.
“This leaves most of the heavy lifting for materials’ EPS growth to cost cutting and productivity gains to improve margin,” which is complicated by higher raw materials prices and rising labor costs, according to Bloomberg Intelligence strategists Kaidi Meng and Laurent Douillet.
The sector’s underperformance stands out in a region where most companies either met or beat expectations. A strong performance in the health-care, financial and tech segments has emboldened sentiment and driven overall estimates for the MSCI Europe index higher.
Expectations for materials companies have been dialed down throughout the season.
Some industries are set to fare worse than others. Basic resources — metals and forestry products — and chemicals are two of the sectors that have seen the sharpest downgrades to estimates, and are some of the industries most vulnerable to a trade war, Goldman Sachs Group Inc. analysts led by Lilia Peytavin said in a note.
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Levies could force EU steelmakers to cut 6 million tons of capacity, while tit-for-tat retaliation may hurt global trade and slash demand, resulting in lower commodities prices, BI’s Alon Olsha and Grant Sporre said. Demand for copper, a key material for wind and solar power as well as electric vehicles, may also dwindle on a US policy shift away from renewables, according to BI’s Meng and Douillet.
The initial outlook for chemicals largely underwhelmed, Citigroup Inc. analyst Sebastian Satz said in an interview, pointing to weak demand. “A hangover from the pandemic – when people bought a lot of durable goods that use chemicals, like mattresses and monitors – combined with high interest rates, supply chain distortions and high energy costs are the main headwinds for the sector.”
Basic chemicals – the acids and petrochemicals used in industrial settings – are exposed to the floundering automotive sector, while the specialized chemicals used in food and household products are vulnerable to the volume slowdown seen by companies such as Nestle SA and Unilever Plc, according to Douillet.
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On a brighter note, looming tariffs may not impact chemicals companies directly given they often produce domestically for local demand, Satz said, though a potential knock-on effect on consumer demand could still put pressure on sales in 2025.
Construction materials offer a silver lining in the wider materials sector.
The likes of Heidelberg Materials AG and Sika AG have large operations in the US, where they benefit from the build out of AI data centers and semiconductor factories, limiting their any tariff impact, according to Meng and Douillet. Switzerland’s Holcim AG’s outlook is supported by “infrastructure modernization and reshoring of manufacturing to drive growth in North America,” Citi analysts led by Ephrem Ravi said.
Germany’s sweeping investment package could reinvigorate domestic manufacturing, Satz said, which may benefit the country’s chemicals giants like BASF SE and Evonik Industries AG. German stocks soared to a record this week after chancellor-in-waiting Friedrich Merz said that the country would unlock billions of euros for defense and infrastructure projects.
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