Global chemical production tumbled in February as output in China declined sharply due to the impact of the coronavirus pandemic, according to the latest American Chemistry Council (ACC) report. Production dropped across all chemical industry segments for the reported month.
Decline Accelerates in February
The Washington, DC-based chemical industry trade group said that the Global Chemical Production Regional Index (CPRI) declined 2.4% in February on a monthly comparison basis. The pace of decline accelerated from a 0.8% drop in January.
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.
By regions, output fell in North America (down 0.1%), Latin America (down 0.3%), Africa & the Middle East (down 0.1%), and Asia-Pacific (down 3.9%). Production in China dropped 6.4% in the month amid disruptions due to the virus outbreak. Production rose in the Former Soviet Union (up 1.2%) while remaining flat in Europe.
With respect to segments, production fell in basic chemicals (down 1.5%), specialty chemicals (down 5%), agricultural chemicals (down 1.3%) and consumer products (down 1.5%) in February.
The ACC also noted that the Global CPRI went down 1.5% year over year on a three-month moving average basis. Global capacity was up 0.3% for the reported month and also increased 3.3% on a year-over-year basis. With a drop in output, capacity utilization for the global chemical industry also slipped 2.1 percentage points to 79.3% in February.
Chemicals Stung by Coronavirus
The chemical industry, which reeled under the effects of the bitter tariff war between the United States and China last year, faces fresh challenges from the coronavirus pandemic, which continues to spread. The death toll of the contagion has already crossed 24,000, with more than 530,000 people infected globally. Notably, outbreaks in the United States, Italy, Spain, Germany and France have worsened over the past several days. The fast-spreading virus has rattled global stock markets on concerns over broader economic impacts from the outbreak.
The outbreak has wreaked havoc on China’s economy. It has paralyzed the country’s manufacturing and service sectors. China’s manufacturing sector, which bore the brunt of the trade war for most part of 2019 and only rebounded toward the end of the year, has suffered another shock. The country’s factory activity slumped to a record low in February as it grappled with coronavirus. China’s services sector also spiraled down to an all-time low in February as new orders fell sharply and demand contracted due to the virus crisis.
The weakness in China’s economy will be heavily felt in the chemical sector as the country is a top consumer of chemicals. Slowdown due to coronavirus is expected to lead to a slump in demand of chemicals including ethylene, polyethylene and polyvinyl chloride in China.
Chemical makers are likely to witness short-term demand weakness in China as coronavirus-induced disruptions are hurting industrial activities in the country. Business activities have come to a halt across the country as millions have been forced to stay at home amid travel restrictions imposed by Beijing.
Notably, the pandemic has slowed down activities in the construction space, a key chemical end-use market, in China. The automotive industry, another major end-market, is also getting hammered by the outbreak.
Chemical makers including Celanese Corporation (CE - Free Report) , Eastman Chemical Company (EMN - Free Report) , Westlake Chemical Corporation (WLK - Free Report) and Huntsman Corporation (HUN - Free Report) echoed concerns of a potential slowdown in demand in China during their December-quarter earnings call. Univar Solutions Inc. (UNVR - Free Report) said yesterday that it is withdrawing its guidance for 2020 due to continued uncertainties as a result of the impact of coronavirus.
Celanese currently carries a Zacks Rank #3 (Hold), while Eastman Chemical and Univar have a Zacks Rank #4 (Sell). Both Westlake Chemical and Huntsman carry a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, chemical makers are grappling with short supply of raw materials as a result of coronavirus. The closure of a large number of factories across China to stem the spread of the virus has even disrupted the global supply chain. The city of Wuhan in Hubei province, where the outbreak was first reported, is one of China's biggest manufacturing centers and the country’s transportation and logistics hub. Coronavirus has impaired logistics across the country.
The supply disruption in China is likely to impact the availability of raw material for the chemical industry at least through the first half of 2020. This is expected to hurt global chemical production.
In particular, U.S. chemical producers are expected to face the heat as they procure several chemicals critical to their production processes from China that are not available elsewhere. Disruptions due to the pandemic are likely to affect the delivery of key inputs used in chemical production. This, in turn, is expected to push up prices of inputs and squeeze margins of chemical companies.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>