Performance is affected by slowdown in demand from automotive, uncertainty about Italian fiscal policy and the trade dispute between the US and China.
- Sluggish growth due to lower demand from key buyer industries
- Payments take 60 days on average
- Insolvencies expected to increase in 2019
Italian chemicals production increased only 1% in 2018, as exports (accounting for 55% of total revenues) grew 2%, compared to 9% in 2017. Domestic demand even contracted in Q4 of 2018. Demand from key buyer sectors, such as the domestic construction industry and the European automotive industry slowed down last year. Chemicals sales to automotive decreased further in H1 of 2019, and there is no rebound in sight.
Due to the sluggish growth of the Italian economy, domestic demand for chemicals is expected to increase a meagre 0.9% in 2019, while exports are forecast to increase 1.9%. Overall production growth will rise 0.7%. Besides the global slowdown in demand from automotive, the sector’s performance is affected by uncertainty about Italian fiscal policy and the trade dispute between the US and China, as well as simmering trade tensions between the US and the EU.
Production of the pharmaceuticals industry in Italy amounted to EUR 32 billion in 2018 (up 3% year-on-year), with Italian-owned producers accounting for 40% of total revenues. Exports accounted for 79% of total revenues, while expenditure for pharmaceuticals in Italy is among the lowest in Europe, and decreasing further.
Despite the more difficult market environment, profit margins of Italian chemicals/pharmaceuticals businesses are expected to remain generally stable over the coming 12 months. On average, payments in the Italian chemicals/pharmaceuticals sector take around 60 days. Payment experience is average, and the level of protracted payments has been stable over the past couple of years.
While the number of insolvencies in the chemicals sector is the lowest of all Italian industries, we expect a (small) increase in payment delays and business failures over the coming 6 months, triggered by lower demand from all main customer segments and long days sales outstanding (DSO) when delivering to end markets. Access to bank loans could tighten after the European Central Bank´s Quantitative Easing programme ends. However, we expect that the insolvency increase in the chemicals sector will remain below the 6% rise we forecast for all Italian business insolvencies in 2019.
Considering the still low level of bank bad debt and the above-average solvency of many businesses, our underwriting approach to the Italian chemicals/pharmaceuticals sector remains positive to neutral.
Nevertheless, our approach is restrictive for the petrochemicals segment, which is impacted by price volatility and fierce competition, combined with a weak financial structure of many businesses. Especially petrochemicals wholesalers show very low margins, with low prices and fiscal crimes being an issue. Pharmaceuticals wholesalers generally have low solvency and high gearing ratios. Bank support is crucial for working capital requirements due to long DSO from end customers.