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Chemicals Witness a Soft Q4 With Sluggish Production Growth

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Global chemicals production remained at a sluggish pace in fourth-quarter 2018 with November witnessing a modest uptick in production on lower capacity utilization, according to the recent monthly report from the American Chemistry Council (“ACC”).

Production Continues on Soft Note

The chemical industry trade group said that the Global Chemical Production Regional Index ("CPRI") rose a paltry 0.1% in November on a monthly comparison basis, following similar growth in October.

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 (“FRB”) production indices.

According to the ACC, the Global CPRI edged down 0.1% year over year on a three-month moving average basis. Capacity utilization for the global chemical industry eased 0.1 percentage points to 83.1% in November. Utilization fell from 86% a year ago.

On a segment basis, production went up in agricultural chemicals and specialty chemicals in November while basic chemicals saw flat growth. By regions, November witnessed higher production across North America, Latin America, Africa and the Middle East and Asia-Pacific. However, output fell in Europe.

Per the ACC, chemical production in the United States went up 0.2% on a monthly comparison basis in November. This follows a 0.5% sequential decline a month ago.  

The trade group expects U.S. chemical production (excluding pharmaceuticals) to rise 3.6% in 2019, following a 3.1% growth in 2018. The expansion is expected to be driven by growth in manufacturing and export, gains in business investment and sustained demand across light vehicles and housing markets.

Trade Tensions Remain a Worry

The prospects of the chemical industry have been clouded by the trade tussle between the United States and China. Washington and Beijing slapped billions of dollars in punitive tariffs on each others’ products last year. China’s tariffs on American products include a wide range of chemicals and plastics.

China is one of the biggest export markets for U.S. chemicals. Beijing’s trade actions have created an uncertain demand environment for U.S. chemical products in this major market. Chemical industry trade groups are worried that the tariffs would hurt U.S. chemical exports and the competitiveness of the American chemical industry. China’s retaliatory tariffs have hit more than 1,000 U.S. chemicals and plastics exports worth an estimated $10.8 billion, per the ACC.

Trade tensions have clouded the overall demand outlook for chemicals. Softer demand from the automotive space of late is a concern for chemical makers. Notably, the U.S.-China trade friction has led to a slowdown in demand in China in this major chemical end-use market.

Meanwhile, the European chemical industry is expected to see a modest growth in 2019, per the European Chemical Industry Council (“CEFIC”). The CEFIC expects chemical output in the European Union to rise 0.5% year over year in 2019. While this would mark a recovery from 2018, the CEFIC envisions trade tensions between the United States, China and Europe as well as the uncertainty around Brexit to impact the industry’s performance this year.

Chemical Stocks to Watch For

A few stocks currently worth considering in the chemical space are Ingevity Corporation (NGVT - Free Report) , Ferro Corporation (FOE - Free Report) , Quaker Chemical Corporation (KWR - Free Report) and Livent Corporation (LTHM - Free Report) . While both Ingevity and Ferro sport a Zacks Rank #1 (Strong Buy), Quaker Chemical and Livent carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingevity has an expected earnings growth of 21.5% for 2019. The company has delivered positive earnings surprise in each of the trailing four quarters, with an average beat of 19.8%.

Ferro has an expected earnings growth of 21.6% for 2019. Earnings estimates for the current year have been revised 4.4% upward over the last 60 days.

Quaker Chemical has an expected earnings growth of 21.1% for 2019. Earnings estimates for the current year have been revised 2.7% upward over the last 60 days.

Livent has an expected earnings growth of 20.5% for 2019. Earnings estimates for the current year have been revised 2.8% upward over the last 60 days.

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