For Immediate Release
Chicago, IL – March 14, 2018 – Today, Zacks Equity Research discusses the Industry: Chemicals, Part 1, including Eastman Chemical Co. (EMN - Free Report) , Celanese Corp. (CE - Free Report) , PPG Industries, Inc. (PPG - Free Report) and Air Products and Chemicals, Inc. (APD - Free Report) .
Industry: Chemicals, Part 1
The chemical industry is riding an upturn in the world economy and continued strength across major end-use markets such as construction, automotive and electronics. Another positive for the industry is a recovery in demand in the energy space – a key chemical end-market that had been out of favor for a spell. The recovery has been driven by the rebound in crude oil prices from their historic lows.
The Zacks Chemicals Diversified industry has outperformed the broader market in a year’s time. The industry has gained around 19.4% over this period, higher than the S&P 500’s corresponding return of roughly 17.8%.
Fourth-quarter earnings season had been a good one for chemical stocks. Notwithstanding a few headwinds including some lingering impacts of devastating hurricanes, chemical companies continued the earnings momentum in the December quarter. We note that a number of companies in the space – including prominent names such as Eastman Chemical Co., Celanese Corp., PPG Industries, Inc. and Air Products and Chemicals, Inc. – produced earnings beats in the quarter.
The outperformance was driven by solid demand across major end-markets as well as strategic measures including productivity improvement, pricing actions, portfolio restructuring and earnings-accretive acquisitions.
Chemical companies continue to shift their focus on high-growth markets (driven by megatrends) in an effort to cut their exposure on other businesses that are struggling with weak demand and input costs pressure. These companies are also increasingly looking for cost synergy opportunities and enhanced operational scale through consolidations.
Cost-cutting measures and productivity improvement actions by chemical companies should continue to reap industry-wide margin improvements in 2018. Moreover, a number of chemical makers are taking appropriate pricing actions to offset raw materials cost inflation, which should also provide margin benefits.
Chemical makers also continue to see strong demand from construction and automotive sectors – major chemical end-use markets. The underlying trends in the housing space remain strong, backed by strong economic growth, steady buyer demand, high homebuilders’ confidence and low unemployment levels.
The automotive sector also continues its good run amid certain challenges, supported by an improving job market, rising personal income, favorable credit conditions, improved consumer confidence and impressive vehicle launches. Rising demand for profitable crossovers, sports utility vehicles and pickups are also aiding the auto industry.
A rebound in crude oil prices has also led to a recovery in demand for chemicals in the energy space, an important end-use market. The recent uptrend in oil prices has been supported by a decline in U.S. oil stockpiles and extension of oil production cuts by OPEC and other major world producers until the end of 2018. The recovery in oil prices has also led to a favorable pricing environment for chemical products.
U.S. Chemical Industry Set to Ride Growth Wave
The U.S. Chemical Industry has recovered from the damaging effects of hurricanes and is set for solid growth in 2018. The American Chemistry Council ("ACC"), an industry trade group, envisions national chemical production (excluding pharmaceuticals) to rise 3.7% in 2018, further accelerating to a 3.9% growth in 2019. The growth is expected to be spurred by higher demand across light vehicles and housing markets, capital investments and improved export markets.
The trade group also expects basic chemicals production to expand 4.7% in 2018 and further gain steam with a 5.2% rise in 2019 on the heels of new capacity additions. The specialty chemicals segment is also expected to see production growth of 2.3% in 2018, per the ACC.
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