Chemical shares trail MSCI World as margins keep sliding

Review of almost 700 firms shows revenue added 4.3 pts to TSR, but margins cut returns by 3.5 pts.

The global chemical industry has reversed nearly two decades of market outperformance and now risks lagging the broader equity market for years, as structural overcapacity and weak demand continue to pressure margins, according to a report from McKinsey.

McKinsey’s review of almost 700 chemical companies showed that, after consistently outperforming the MSCI World Index from 2004 to 2023, the sector has effectively erased those gains over the past three years.

Total shareholder return (TSR) for the chemical sector averaged 2.6% per year over the past five years, driven largely by valuation multiple expansion rather than operating performance, as margins declined and heavy capital investment diluted returns.

The report found that revenue growth contributed 4.3 percentage points to TSR over the period, but falling margins reduced returns by 3.5 points, reflecting sustained overcapacity across several core chemical value chains.

Capacity additions have continued to outpace consumption growth, particularly in polyethylene, polyurethane, and polystyrene, where China has accelerated investment and reshaped global supply-demand balances.

Performance differences across company types have also narrowed. Over the long term, base and specialty chemical companies delivered similar TSR compound annual growth rates of 10.1% and 9.7%, respectively, since 2003, whilst diversified chemical companies lagged at 7.3%.

However, earnings volatility remained significantly higher for base chemical producers, with EBITDA margin volatility nearly three times that of specialty chemicals between 2010 and 2025.

Despite persistent headwinds, McKinsey noted early signs of stabilisation in parts of Asia, where margins in certain supply chains have moved closer to breakeven.

Asset rationalisation has accelerated through closures and consolidation, although these actions have yet to materially rebalance global supply and demand. Analysts continue to forecast a recovery in sector earnings, but actual performance has repeatedly fallen short of expectations

McKinsey said chemical companies face a prolonged period of adjustment, requiring structural cost reduction, disciplined capital allocation, and active portfolio management to restore competitiveness.

Without decisive action, the firm warned that returns may continue to trail the broader market even as valuations assume a cyclical recovery.