Specialty chemicals that include catalysts, surfactants, speciality polymers, coating additives and oilfield chemicals are used in specific fields based on their performance. They have application in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.
The specialty chemical industry enjoyed a smooth run in first-half 2019. Notably, some of the companies in the space have been on a roll this year, having delivered healthy returns year to date.
Zacks Chemicals Specialty industry has outperformed the broader market in the first half. The industry saw a rise of around 20% in this period, higher than the S&P 500’s corresponding growth of roughly 16.1%.
Moreover, the Zacks Chemicals Specialty industry currently carries a Zacks Industry Rank #102, which places it in the top 40% of more than 250 Zacks industries. Our back testing shows that the top 50% of the Zacks ranked industries outperforms the bottom half by a factor of more than two to one.
Industry Set to Ride High
The specialty chemical industry is poised for an upside this year on healthy demand in key end-use markets such as construction, automotive, agriculture and energy. Notably, rising housing construction activities, especially in Asia, and higher automotive production is driving demand for paints and coatings.
Moreover, an ever-growing world population and the concomitant need to beef up food supply to feed more mouths remains a prime catalyst for growth in demand for agricultural chemicals. Higher exploration and drilling activities globally to address rising energy needs are also pushing up demand for oilfield chemicals.
The companies in the specialty chemical space are also gaining from strategic measures including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement and earnings-accretive acquisitions. Moreover, a number of companies are taking aggressive price increase actions in the wake of raw material cost inflation. These actions should provide margin benefits.
In particular, prospects for the U.S. specialty chemical industry appear upbeat, driven by strength in the U.S. economy, healthy industrial activities and continued strong demand across construction and automotive end markets.
The overall outlook for the U.S. chemical industry is encouraging. The American Chemistry Council ("ACC"), a leading industry trade group, expects expansion of the domestic chemical industry to continue this year notwithstanding a challenging world economy. The trade group expects the U.S. chemical industry to grow 2.5% in 2019.
Growth is expected to be spurred by strength across major chemical end-use markets and significant shale gas-linked investment on capacity expansion. While the automotive sector is expected to remain at high levels, slow recovery in the housing market is expected to continue. On a segment basis, the ACC sees strong gains in production in organic chemicals, inorganic chemicals and other specialty chemicals in 2019.
Trade Tariffs Remain a Drag
The chemical industry has been bruised by trade tensions between the United States and China. The Trump administration slapped punitive tariffs on $250 billion worth of Chinese products last year while China has imposed retaliatory tariffs on $110 billion in U.S. goods. China’s tariffs on American products include a wide range of petrochemicals, specialty chemicals and plastics.
According to the ACC, the United States has levied tariffs on $15.4 billion worth of imports of chemicals and plastics from China, with Beijing retaliating with duties on $11 billion in U.S. exports of chemicals and plastics to China.
The U.S. administration, in May 2019, also proposed new round of tariffs on $300 billion worth of Chinese imports. The proposed tariffs include $11 billion in chemicals and plastics products, per the ACC. According to the trade group, the total value of U.S. chemicals and plastics imports from China subject to tariffs would reach $26.4 billion should the new round of tariffs come into effect.
The United States and China, last month, agreed to a tentative trade truce at the G20 Summit in Japan that could potentially resolve the trade dispute between the world’s two biggest economies. The countries, which are engaged in a fierce trade conflict since last year, agreed to resume trade talks after President Trump agreed to hold back from imposing new tariffs on an additional $300 billion worth of Chinese goods. This would bring some respite to the U.S. chemical industry.
However, the tariffs currently in place are already doing harm to the U.S. chemical industry. China is one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory trade actions have created an uncertain demand environment for U.S. chemical products in this major market. The tariffs are hurting U.S. chemical exports and the competitiveness of the American chemical industry.
4 Stocks Set to Ride the Upswing
Notwithstanding the concerns over trade tariffs, the specialty chemical industry is poised for an upturn on growing demand from major end-markets such as automotive and construction.
As such, it would be prudent to zero in on specialty chemical stocks that have compelling growth prospects. We highlight the following four stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) that offer good investment opportunities in the second half. You can see the complete list of today’s Zacks #1 Rank stocks here.
Axalta Coating Systems Ltd. (AXTA - Free Report)
Pennsylvania-based Axalta is a solid choice, armed with a Zacks Rank #1. The company has expected earnings growth of 34.4% for 2019. Earnings estimates for 2019 have been revised 0.6% upward over the last 60 days. The company also delivered positive earnings surprise in three of the trailing four quarters, with an average positive surprise of 19.6%. The stock has also returned 30% so far this year.
Flexible Solutions International Inc. (FSI - Free Report)
Our next pick in the space is Canada-based Flexible Solutions sporting a Zacks Rank #1. It has an expected earnings growth of 342.9% for 2019. Earnings estimates for the current year have been revised 63.2% upward over the last 60 days. The stock has also returned a whopping 206% year to date.
Westlake Chemical Partners LP (WLKP - Free Report)
Texas-based Westlake Chemical Partners carries a Zacks Rank #1. The company has expected earnings growth of 39.7% for 2019. Earnings estimates for the current year have been revised 1.4% upward over the last 60 days.
Israel Chemicals Ltd. (ICL - Free Report)
Based in Tel Aviv, Israel Chemicals has expected earnings growth of 13.5% for the current year. The company also delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 13.7%.
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