The specialty chemical industry reeled under the effects of significant demand contraction in 2020, following a slowdown in industrial and economic activities amid the global health crisis. However, the industry witnessed a recovery in 2021 on an uptick in demand in key markets.

With the reopening of the major economies around the world, demand for specialty chemicals started to pick up on a rebound in global industrial and manufacturing activities. Notably, demand for specialty chemicals in the United States has been driven by a surge in consumer spending, aided by the accelerated deployment of vaccines coupled with the sizable coronavirus stimulus.

While the specialty chemical industry remains hamstrung by supply-chain disruptions and a spike in raw material and logistic costs, healthy demand in key end-use markets bodes well. Stocks like AdvanSix Inc. (ASIX Quick QuoteASIX - Free Report) , Hawkins, Inc. (HWKN Quick QuoteHWKN - Free Report) , ICL Group Ltd (ICL Quick QuoteICL - Free Report) and Livent Corporation are good choice for investment in the current scenario.

Specialty chemicals that include catalysts, surfactants, specialty polymers and coating additives have application in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics. Automotive, construction, textile, food & beverages, electronics, energy and agriculture are among the top markets for these chemicals.

The automotive sector has made a recovery after hitting a major speed bump due to the pandemic in 2020, courtesy of a strong rebound in customer demand for new vehicles, low auto loan interest rates and rising preference for private transportation in the wake of the pandemic. Specialty chemicals makers saw healthy demand in automotive in 2021 despite the negative impact on global auto production due to semiconductor shortages.

The National Automobile Dealers Association (“NADA”) expects U.S. new-vehicle sales to rise 3.4% year over year to 15.4 million units in 2022. New-vehicle sales in 2021 were impacted by the pandemic and the semiconductor shortages, which contributed to constrained vehicle inventory at dealerships across the United States. Notably, new-vehicle sales went up 3.1% year over year to 14.93 million units last year. NADA sees the disruptions from microchip shortages to continue through at least second-quarter 2022.

Meanwhile, a resilient construction sector is driving demand for specialty chemicals such as paints and coatings. Residential construction has picked up around the world, supported by lower interest rates and higher demand for new properties due to the rising trend of work from home amid the pandemic.

The U.S. manufacturing sector also remains in the expansion territory despite supply-chain issues and raw material shortages, aided by higher demand for goods and an upturn in the overall economy. The manufacturing sector is a major driver for the chemical industry, which touches around 96% of manufactured goods.

The American Chemistry Council (“ACC”) expects the U.S. chemical industry to accelerate in 2022 on the back of strong consumer demand, aided by the resumption of manufacturing activities and restocking of inventories. The chemical industry trade group projects U.S. specialty chemicals volumes to expand 4.1% in 2022, following 2.6% growth in 2021.

However, specialty chemical makers are grappling with raw material cost inflation, and supply-chain and freight transportation disruptions. The closure of a large swath of factories to stem the spread of the COVID-19 outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the specialty chemical industry. The industry also faces headwinds from higher costs associated with logistics constraints and port delays. The shipping bottlenecks have led to a surge in freight costs.

The specialty chemical industry bore the brunt of the impacts from the devastating winter storm in the U.S. Gulf Coast — the biggest refining and petrochemical production hub in North America — during the first half of 2021. The supply crunch was worsened by Hurricane Ida. The Category 4 hurricane caused significant damage to critical industries in the Gulf Coast area, with chemicals being among the hardest hit. Force majeures and plant shutdowns associated with Ida further squeezed the supply of major raw materials and pushed up their prices. Ida also curbed chemical production due to raw material and supply constraints.

The bottlenecks are unlikely to die down soon as the rapid spread of the Omicron variant of coronavirus threatens to exacerbate pressure on the already strained global supply chain. The lingering impacts of supply-chain upheavals are expected to continue over the short haul and exert pressure on the margins of chemical specialty companies.

4 Stocks Worth Betting On

Although the specialty chemical industry is exposed to headwinds from supply-chain bottlenecks and higher raw material and logistics costs due to coronavirus and weather-related events, higher demand across key markets represents a tailwind for the industry.

We highlight the following four stocks with a solid Zacks Rank that are good options for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities.

You can see the complete list of today’s Zacks #1 Rank stocks here.

AdvanSix: New Jersey-based AdvanSix is expected to benefit from improved end-market conditions and growth of its differentiated products. ASIX is seeing a recovery in demand across a number of markets, including automotive, building & construction, electronics and packaging. Higher demand is expected to drive its volumes. Strong agricultural industry fundamentals also bode well.

AdvanSix, sporting a Zacks Rank #1, has expected earnings growth of 3.9% for the current year. The Zacks Consensus Estimate for current-year earnings for ASIX has been revised 1.6% upward over the last 60 days. The company beat the Zacks Consensus Estimate in each of the trailing four quarters at an average of 46.9%.

Hawkins: Minnesota-based Hawkins has a Zacks Rank #2. It is seeing strong growth in its Water Treatment unit, riding on strength across pools, resort and fitness center end markets. Acquisitions of ADC and C&L Aqua are also contributing to its performance. Higher demand for health and immunity products is driving its Health and Nutrition segment. HWKN’s Industrial segment is also benefiting from higher sales of agricultural, pharmaceutical and food ingredient products. The acquisition of NAPCO Chemical also expands its Water Treatment business.

Hawkins has expected earnings growth of 15.4% for the current fiscal year. The consensus estimate for HWKN’s earnings for the current fiscal has been revised 5.7% upward over the last 60 days. It beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once. It has a trailing four-quarter earnings surprise of roughly 21%, on average.

ICL Group: Israel-based ICL Group carries a Zacks Rank #2. It is benefiting from the strength in its specialties businesses and an upside in commodity prices. ICL is seeing higher demand across consumer electronics, textiles, automotive and construction markets. Higher end-market demand and prices are expected to drive its performance. A recovery in end markets is likely to drive sales of its bromine compounds and phosphorous and magnesia-based products. Solid demand for electric vehicles and energy storage is also expected to drive demand for its phosphate and bromine-based specialty products.

ICL Group has expected earnings growth of 50.9% for the current year. The Zacks Consensus Estimate for ICL’s current-year earnings has been revised 3.8% upward over the last 60 days. The company beat the Zacks Consensus Estimate in each of the trailing four quarters at an average of 59.6%.

Livent: Pennsylvania-based Livent is expected to benefit from strong demand and high lithium pricing, aided by strong market conditions. Higher realized pricing is expected to drive its top line and margins. LTHM also remains on track with its near-term capacity expansions, with the 5,000 metric ton hydroxide addition in Bessemer City and initial lithium carbonate expansion of 10,000 metric tons in Argentina expected to attain commercial production by third-quarter 2022 and first-quarter 2023, respectively.

Livent, carrying a Zacks Rank #2, has expected earnings growth of 186.7% for the current year. The Zacks Consensus Estimate for earnings for the current year for LTHM has been revised 10.3% upward over the last 60 days.