JPMorgan Cautious on European Chemicals, Cites China Pressure and Margin Squeeze

JPMorgan has reiterated a cautious outlook on the European chemicals sector, highlighting that structural overcapacity and rising competition from China continue to challenge the industry's fundamentals. Analysts at the bank warn that these long-term pressures are creating a difficult operating environment, even as near-term indicators appear stable.

Sector Headwinds Intensify

According to a note from analysts led by Chetan Udeshi, European producers face "the clearest margin squeeze" due to a combination of higher feedstock and energy costs, weak demand, and persistent deep spot discounts. While commodity margins in China have seen a modest recovery, they remain well below their peaks from earlier in the year.

The note also points to compounding factors, including higher European gas prices and low water levels on the Rhine River. Geopolitical tailwinds have also reversed, with the bank stating that Middle East-related tensions are "likely turning into an incremental headwind." As a result, JPMorgan's 2027 earnings estimates are materially below consensus for a significant portion of the sector.

Consolidation Seen as Key

JPMorgan identifies industry consolidation as "one of the few credible pathways" for companies to structurally improve their competitiveness. The analysts cite several recent examples, including the announced Akzo Nobel/Axalta merger, Syensqo’s strategic review of its Performance & Care division, and reported interest from BASF in acquiring Evonik.

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However, the bank believes a potential BASF-Evonik deal offers more limited upside compared to other strategic alternatives. JPMorgan suggested that BASF pursuing Syensqo’s Performance & Care unit could be a more value-accretive transaction.

Stock-Specific Ratings

JPMorgan's analysis included several key rating changes and preferences within the sector:

• Overweight: The bank's top pick is Novonesis, which it praises for having "the strongest structural organic growth profile in the sector" and a post-tax return on invested capital (ROIC) of over 20%. Other Overweight-rated stocks include Akzo Nobel, Croda, Clariant, Fuchs, and Solvay. Umicore and Syensqo were also placed on a positive Catalyst Watch.
• Underweight: JPMorgan assigned Underweight ratings to BASF, Wacker, Yara, Evonik, Brenntag, IMCD, DSM-Firmenich, and Arkema. For BASF, the analysts see its "premium valuation... disconnected from challenged fundamentals." For Wacker, they called the stock's valuation "too high" relative to a projected return on tangible equity of just 1% to 3% for 2027-28.