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Global Chemical Recovery Continues to Take Hold: 5 Top Picks

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Global chemical production expanded for the eighth straight month in January on higher output in all chemical-producing regions, according to the latest American Chemistry Council (“ACC”) report. All chemical industry segments saw growth for the reported month.

Upbeat January Readings

The Washington, DC-based chemical industry trade group said that the Global Chemical Production Regional Index (“CPRI”) went up 1.4% in January on a monthly comparison basis. This follows a 2% rise in December. The growth reflects sustained recovery in activities that started in June 2020 after declining from January through May.

The Global CPRI, which is measured using a three-month moving average, measures chemical production volumes for 33 major nations, sub-regions and regions. It is comparable to the Federal Reserve Board production indices.

By regions, output rose in North America (up 0.7%), Europe (up 1.5%), Asia-Pacific (up 1.7%), Latin America (up 0.1%), Africa & the Middle East (up 0.6%) and Former Soviet Union (up 1.3%).  

With respect to segments, production expanded 1.5% in basic chemicals, 1.2% in specialty chemicals, 2.5% in agricultural chemicals and 0.5% in consumer products in January.

Global capacity ticked up 0.1% for the reported month and also expanded 2.2% on a year-over-year basis. Capacity utilization for the global chemical industry also increased 1.1 percentage point to 87.5% in January on the back of improved production.

Chemical Industry Back on Track After Pandemic-led Downturn

The chemical industry has rebounded from the coronavirus blues on a recovery in industrial demand. Lockdowns and restrictions by governments around the world, in response to the pandemic, halted industrial activities through the first half of 2020 and gutted demand for chemicals in key end-use markets including automotive, construction and electronics.

The industry also faced the heat from short supply of raw materials and higher logistics costs as a result of the pandemic. Weaker demand coupled with a sharp contraction in oil prices also exerted pressure on the product prices of chemical makers.

However, chemical demand started to pick up from the third quarter of 2020 on a return of global economic activities and an economic rebound in China — a top consumer of chemicals. Demand for chemicals has recovered across major end-use industries on a rebound in industrial and manufacturing activities globally.

Notably, business activities in China remain strong as the country continues its recovery to pre-pandemic levels, thanks to government’s strict virus containment actions. China’s industrial sector is gaining strength, supported by firm domestic demand, strong exports and government stimulus measures. China's manufacturing activities have also picked up on demand revival with the pace of recovery accelerating in the final quarter of 2020. Manufacturing activities also remained in the expansion territory in the first two months of 2021. The country’s construction sector is also gaining momentum on China government’s big infrastructure investment drive.

Moreover, economic activities have recovered in the United States after slumping during much of spring amid virus-led lockdowns last year. The economic recovery started in May 2020 after major parts of the United States reopened for business following coronavirus-led shutdowns. Lockdowns and travel restrictions brought economic activities to a near-standstill in March and April. The U.S. manufacturing sector has also recuperated from a sharp contraction in the early days of the pandemic on a demand recovery and an upturn in the overall economy.

Meanwhile, a strong rebound in construction and automotive, two major chemical-consuming markets, represents a tailwind for the chemical industry. The automotive industry has gotten back into the groove after the virus-led slump riding on a revival in consumer demand. A rebound in automotive OEM production rates has led to a recovery in demand for chemicals in the automotive market. The construction sector has also bounced back with the resumption of many projects, which were postponed earlier due to labor shortage and supply chain disruptions. Notably, strength is being witnessed in residential construction globally. A recovery in major markets augurs well for the chemical industry moving ahead.

5 Chemical Stocks to Snap Up

The chemical industry has pulled of a comeback from the pandemic-led slump and is poised for an upturn this year on a rebound across major end-markets and recovering industrial and manufacturing activities globally. As such, it would be prudent to invest in stocks in the space that have compelling prospects and are well poised for solid upside.

We highlight the following five stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.

LyondellBasell Industries N.V. (LYB - Free Report)

LyondellBasell sports a Zacks Rank #1. The company should gain from higher demand for its products owing to a recovery in global economies. It is witnessing improved volumes from automotive and other durable goods markets and strong demand from packaging and health care markets. It will also benefit from synergies of the A. Schulman buyout and the polyethylene joint venture with Sasol. The Hyperzone HDPE plant is also expected to contribute to its margins.

The company has expected earnings growth of 94.7% for the current year. Moreover, the Zacks Consensus Estimate for current-year earnings has been revised 42.2% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 27.8%. Its shares are also up around 48% over the past six months.

Trinseo S.A. (TSE - Free Report)

The Pennsylvania-based company flaunts a Zacks Rank #1. It is expected to benefit from demand strength in end markets such as tires, automotive, appliances, construction and packaging, which is likely to drive its volumes. Benefits of cost-reduction and commercial excellence initiatives are also expected to get reflected on its performance. Moreover, the recently announced acquisition of Arkema’s polymethyl methacrylates and activated methyl methacrylates businesses will allow the company to transform to a higher-margin, less-cyclical solutions provider. The buyout is also expected to deliver meaningful cost synergies and IT-related productivity savings.

Trinseo has expected earnings growth of 144.4% for the current year. The consensus estimate for the current year has been revised 37.6% upward over the last 60 days. The stock has also shot up roughly 155% over the past six months.

Daqo New Energy Corp. (DQ - Free Report)

China-based Daqo New Energy sports a Zacks Rank #1. The company is expected to gain from higher production and sales volumes for polysilicon. Its facilities are currently running with increased efficiency, which is likely to drive production volumes. The company’s efforts to improve its cost structure are also likely to lend support to its margins. Its energy efficiency efforts and enhanced manufacturing efficiencies are contributing to lower costs.

The company has expected earnings growth of 395% for the current year. Moreover, the Zacks Consensus Estimate for current-year earnings has been revised 7.6% upward over the last 60 days. Its shares have also soared around 304% over the past six months.

Cabot Corporation (CBT - Free Report)

Massachusetts-based Cabot carries a Zacks Rank #2. The company should gain from a recovery in demand from its automotive and tire customers from the pandemic-led slowdown, its disciplined execution of operations and targeted growth initiatives. Cabot is seeing strong volumes in the tire and automotive markets on the back of continued global recovery. The company should also benefit from the acquisition of Shenzhen Sanshun Nano New Materials. The acquisition significantly bolsters the market position and formulation capabilities of Cabot in the high-growth batteries market, especially in China.

Cabot has expected earnings growth of 82.7% for the current fiscal year. Moreover, the consensus estimate for current fiscal year earnings has been revised 19.5% upward over the last 60 days. The company’s shares are also up around 32% over the past six months.

Olin Corporation (OLN - Free Report)

Based in Missouri, Olin carries a Zacks Rank #2. The company should benefit from its actions to improve its cost structure and efficiency and drive productivity through a number of projects. It is also expected to gain from cost and other benefits from its investment in the IT project. The Lake City U.S. Army ammunition contract should also drive sales and profitability of its Winchester segment.

The company has expected earnings growth of 188.2% for the current year. Moreover, the consensus estimate for current-year earnings has been revised 75% upward over the last 60 days. Its shares have also surged around 172% over the past six months.

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