UBS Securities Tuesday raised is outlook for the chemicals industry, citing in part the continued strength in the global industrial and agricultural economy.
UBS strategist David Bianco noted that the ag industry is one of the larger end-markets for the chemical sector, and the largest for DuPont and Monsanto.
“We believe the rapid growth from emerging markets is going to provide a secular wind to these companies,” Bianco said. “As per-capita incomes rise, there is a shift towards more high-value animal protein.”
Bianco said that from 1980-2000, per-capita meat consumption in China jumped by more than 300 percent, and is still close to only a third of the per-capita consumption in the U.S. Demand for meat is expected to rise by more than 55 percent between 1997 and 2020, with most of that coming from developing countries. China is expected to account for about 40 percent of that increase.
He said the growth in meat consumption will have a bigger impact on grain demand for animal feed. In 1997, 62 percent of corn consumption in the U.S. was for animal feed, versus 21 percent in developing countries. According to the International Food Policy Research Institute, 46 percent additional grains will be needed for animal feed in 2020 compared to the early 1990s, with China accounting for 32 percent of the increase.
“Since most of the arable land in Asia is already under cultivation, only productivity gains in crop production will help meet rising demand,” Bianco said. “The main driver in increasing yield comes from the ability to modify seeds (with seed treatment of ag-biotech) so they can be more resistant to drought/weather conditions, pests and weeds.”
End-market exposure of S&P 500 Chemical companies based on 2005 revenues.
Bianco pointed out that the U.S. has benefited greatly from advances in agronomics, planting 20 percent less corn acreage than it did 70 years ago while production is 10 times higher. Only 45 percent of corn seed planted in North America uses biotechnology, he said, with overseas markets even less penetrated - China is at 18 percent, Brazil is at 6 percent, and the EU is at 7 percent - presenting a major opportunity for chemicals companies.