Europe materials industry feels US tariff, China heat

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.

The sector, which includes companies like paint-maker Akzo Nobel NV, fertiliser 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 healthcare, 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.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.”