Not All Chemical Companies Benefit From Lower Oil Prices

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Oil prices have plunged dramatically since mid-2014.Brent closed at $48.40 today on the NYMEX. This is a far cry from the over $100 a barrel that seemed to be the floor up until a few months ago.

Conventional wisdom holds that lower crude oil prices should benefit chemical firms as they use oil as one of the key ingredients in making the various chemicals and related-products. However not all chemical firms benefit from lower oil prices. This is because some of them use natural gas as opposed to oil for their feedstocks. Hence price of natural gas affects them more than price of oil.

From an October, 2014 article in ICIS, the industry publication:

The collapse in crude oil prices will cause pain for petrochemical companies. One might think that lower oil prices would result in lower feedstock costs, boosting margins. This dynamic may work to some extent, but is far outweighed by the impact on prices.

Chemical prices move with crude oil, and the impact on margins tends to be more favourable on the upside versus the downside. Why? Because when oil prices are moving higher, producers dictate the conversation on pricing. Conversely, on the downside, the pricing discussions are dominated by buyers.

The article is worth a read in its entirety. Here is another interesting part from the article:

Chemical companies with significant assets in the US have been getting a double benefit – not only do they use mainly low natural gas based feedstocks, but also reap the benefit of high chemical prices which are based on crude oil.

Although around 80% of US cracker feedstocks are derived from natural gas liquids (NGLs) – ethane (58%) and propane and butane (22%) based on 2013 statistics from ICIS – US chemical prices follow crude oil.

Source: Commentary: Oil puts chemicals over a barrel, October 17, 2014, ICIS

Asian and European chemical firms should benefit from cheaper oil since they mostly use oil-based naphtha for feedstock. Hence compared they are a better bet than American chemical stocks.

Among European chemical majors, BASF, the world’s largest chemical maker can be avoided since lower oil prices is actually hurting the firm due to its direct exposure to oil through its Wintershall unit. Since BASF derives about 30% of revenue from this unit low oil prices negatively impacts BASF.

Ten European chemical stocks are listed below for consideration:

1.Company:Air Liquide (AIQUY)
Current Dividend Yield: 2.65%
Country: France

2.Company:Arkema (ARKAY)
Current Dividend Yield: 3.66%
Country: France

3.Company: Solvay(SVYZY)
Current Dividend Yield:3.29%
Country: Belgium

4.Company: Akzo Nobel(AKZOY)
Current Dividend Yield: 3.38%
Country: The Netherlands

5.Company:Syngenta AG (SYT)
Current Dividend Yield: 3.50%
Country: Switzerland

6.Company: Linde AG (LNEGY)
Current Dividend Yield: 2.25%
Country: Germany

7.Company: BayerAG (BAYRY)
Current Dividend Yield: 2.09%
Country: Germany

8.Company: K+S AG (KPLUY)
Current Dividend Yield: 1.20%
Country: Germany

9.Company: Yara Internationa (YARIY)
Current Dividend Yield: 3.26%
Country: Norway

10.Company: Royal DSM(RDSMY)
Current Dividend Yield: 4.10%
Country: The Netherlands

Note: Dividend yields noted above are as of Jan 15, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long AKZOY

A Note on the “Big Four” in Four Countries

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In many countries across the world banking industry is dominated by a handful of banks. These banks are the largest in those countries based on factors like market capitalization, market share of deposits, home mortgages, etc. In a few countries just four banks dominate the industry. These banks are called as the “Big Four”. According to Wikipedia:

Big Four is the colloquial name for the four main banks in several countries, where the banking industry is dominated by just four institutions and where the phrase has gained currency.

In this post lets take a quick look at these four banks in four countries.

1) Australia/New Zealand: 

The big four hold most of the home mortgages in these two countries. These banks are: Australia and New Zealand Banking Group(ANZBY), Commonwealth Bank(CMWAY), National Australia Bank(NABZY) and Westpac (WBK). All four are excellent dividend payers. Their current dividend yields are 5.96%, 5.16%, 6.34% and 5.88% respectively.

2) China:

Similar to other BRIC countries, state-owned banks are a major part of the Chinese banking industry. The big four banks in China are Bank of China (BACHY), China Construction Bank (CICHY), Industrial and Commercial Bank of China(IDCBY) and Agricultural Bank of China (ACGBY).

3) Sweden:

Swedish banks are somewhat insulated from the issues affecting the Euro zone since Sweden has its own currency. Banks in Sweden recovered strongly from the financial crisis and are in a much better shape than their European peers. In fact all big four banks of Sweden raised their dividend payments last year. The Swedish big four are:Nordea Bank AB(NRBAY), Skandinaviska Enskilda Banken AB(SKVKY), Svenska Handelsbanken AB(SVNLY) and Swedbank AB(SWDBY).

4) UK:

The four major banks in the UK are Barclays(BCS), HSBC (HBC), Lloyds Banking Group (LYG) and The Royal Bank of Scotland Group (RBS). Standard Chartered(SCBFF) is a major player in the international market especially in Asia and Africa.

RBS is majority-owned by the state.From an investment standpoint Barclays and HSBC are better bets now than others.

Note: Dividend yields noted above are as of Jan 14, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long LYG, SWDBY, NABZY

Five Mistakes to Avoid in Emerging Markets Investing

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Investing in emerging market equities is fraught with risks.Unlike the developed world developing countries are prone to suffer from a myriad of risks including currency exchange risk, political risk, liquidity risk, transparency risk, etc.

Investors looking to gain exposure to emerging markets should be aware of these risks and take extra precaution before jumping in. Five mistakes that investors can avoid when investing in emerging stocks are listed below:

  1. Failing to take into account political risks.
  2. Selecting wrong country for dividend stocks.
  3. Selecting the wrong sector for investment in a specific country.
  4. Assuming economic growth and higher equity prices are related.
  5. Assuming investments in developed world’s multinationals is enough to profit from the growth in emerging markets.

For example, Brazilian equities have been in doldrums for the past few years under President Dilma Rousseff’s administration and recently she won the election again for a second term. So investors have to brace themselves for a rough ride with Brazilian stocks.

Certain emerging countries are not great for dividend stocks.Countries like India, South Korea can be avoided when hunting for these type of stocks while countries like Chile, Mexico, Taiwan, Malaysia, etc. offer many excellent dividend opportunities.

Ten stocks from emerging markets are listed below with their current dividends for potential investment opportunities:

1.Company: Standard Bank Group Limited (SGBLY)
Current Dividend Yield: 4.16%
Sector: Banking
Country: South Africa

2.Company:Banco Santander- Chile (BSAC)
Current Dividend Yield: 4.96%
Sector: Banking
Country: Chile

3.Company:Empresa Nacional de Electricidad SA (EOC)
Current Dividend Yield: 2.07%
Sector:Electric Utilities
Country: Chile

4.Company:Fomento Economico Mexicano SAB de CV (FMX)
Current Dividend Yield: 3.58%
Sector:Beverages
Country:Mexico

5.Company: Malayan Banking Berhad (MLYBY)
Current Dividend Yield: 7.06%
Sector: Banking
Country:Malaysia

6.Company: Lukoil (LUKOY)
Current Dividend Yield: 6.51%
Sector: Oil & Gas – Integrated
Country:Russia

7.Company: PetroChina Co Ltd (PTR)
Current Dividend Yield: 4.66%
Sector: Oil & Gas – Integrated
Country: China

8.Company:Taiwan Semiconductor Manufacturing Co Ltd (TSM)
Current Dividend Yield: 2.36%
Sector: Semiconductors & Semiconductor Equipment
Country:Taiwan

9.Company:Philippine Long Distance Telephone Co (PHI)
Current Dividend Yield: 4.47%
Sector: Telecom
Country: Philippines

10.Company: Nedbank Group Limited (NDBKY)
Current Dividend Yield: 4.20%
Sector: Banking
Country: South Africa

Note: Dividend yields noted above are as of Jan 9, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long BSAC

Review: The Callan Periodic Table of Investment Returns 1995-2014

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Callan Associates has updated their famous Periodic Table of Investment Returns with data for 2014. It is interesting to review this chart every year and analyze how markets performed across the world.

The Callan Periodic Table of Investment Returns for 2014 is shown below:

Click to enlarge

Callan Table of Investment Returns 1995 To 2014

Source: Callan Associates

A few observations:

  • For 2014, the U.S. market as represented by the S&P 500 was the best performer with a price return of 13.69%.
  • The MSCI indices for emerging markets and EAFE were down by 1.82% and 4.99% respectively.
  • This chart once again shows the importance of diversification. For example, bonds returned a solid 5.97% last year compared to the disastrous performance of emerging market stocks.
  • Since the global financial crisis in 2008, the S&P 500 has has double digit growth every year except 2011. So investing in an index fund such the SPY ETF is a prudent strategy for some retail investors as opposing to trying to pick individual companies.
  • Emerging market equities had spectacular runs for five years from 2003 till 2007 but have lost their shine since the financial crisis as the global commodity boom ended. So the takeaway is that one cannot simply invest in an emerging fund for the long-term without making any changes. Identifying and selecting high-quality companies is a must in emerging markets.

Related ETFs:

  • iShares Dow Jones Select Dividend ETF (DVY)
  • SPDR S&P Dividend ETF (SDY)
  • Vanguard Dividend Appreciation ETF (VIG)
  • SPDR S&P 400 Mid Cap Growth ETF (MDYG)
  • iShares Russell Midcap Index Fund (IWR)
  • iShares MSCI Emerging Markets Indx (EEM)
  • SPDR S&P 500 ETF (SPY)
  • SPDR STOXX Europe 50 ETF (FEU)

Disclosure: No Positions

You may also want to checkout the Callan Table for 2013, 2012, 2011 and 2010.

Download: The Callan Periodic Table of Investment Returns 1995-2014 (in pdf)

Related: The Callan Periodic Table of Investment Returns 2016: A Review