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Chemical Industry Eyes Recovery From Coronavirus Crisis: 5 Picks

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Chemical is among the industries that have been heavily hit by the coronavirus pandemic. The space, which reeled under the effects of the bitter tariff war between the United States and China last year, received yet another blow from the deadly virus outbreak.
Tough First Half for Chemicals

Chemical makers faced the heat from a significant downturn in demand in the first quarter of 2020. The pandemic brought industrial activities to a grinding halt globally during the quarter, squeezing demand for chemicals. The impact of demand slowdown was well visible in the first-quarter performance of chemical makers.

In particular, the weakness in China’s economy was heavily felt in the March quarter. Coronavirus-induced disruptions hurt industrial activities in China, a top consumer of chemicals.

The pandemic slowed down activities in the construction space (a key chemical end-use market) in China. The automotive industry, another major end-market for chemicals, also got battered as the outbreak pummelled demand and disrupted supply chains. Coronavirus also hurt business activities in other parts of Asia and Europe. The difficult demand environment is expected to persist through the first half of 2020.

Chemical makers also faced headwinds from short supply of raw materials as a result of the pandemic. The closure of a large swath of factories across China to blunt the spread of the virus disrupted the global supply chain and impaired logistics.

The supply disruption in China impacted the availability of raw material for the chemical industry during the first quarter, leading to a spike in costs of these inputs. Notably, U.S. chemical producers procure several chemicals critical to their production processes from China that are not available elsewhere. The impacts of the supply chain disruption are expected to continue through the second quarter.

China Rebounds, Reopening of Economies Give Hope

With China seeing an economic rebound and many of the major economies around the world gradually opening up, things are looking better for the chemical industry in the second half of the year. Lockdown measures are slowly being lifted by governments across Europe and Asia in an effort to resuscitate their economies. Some states in the United States have also recently opted to ease restrictions on business activities. However, the road to recovery may not be smooth given the potential for a “second wave” of infections.

Meanwhile, life is springing back to normalcy in China where coronavirus first broke out. The outbreak had a devastating effect on China’s first-quarter economic growth. China’s GDP shrank 6.8% year over year in the first quarter, the first contraction in decades, as travel restrictions and quarantine measures hurt industrial production and retail sales. Some lingering impacts of coronavirus are also expected in the second quarter.

However, government stimulus measures are likely to cushion the country’s crisis-hit economy and lead to a better second half. Chinese authorities have pledged a raft of stimulus measures to counter the economic fallout from the outbreak. Beijing is looking to rev up the economy with big infrastructure spending and is also taking steps to boost domestic consumption. China, last month, unveiled a roughly $500 billion stimulus focused on tax cuts, infrastructure projects and job creation to get the world’s second-largest economy back on track.

The manufacturing sector in China, which bore the brunt of the trade war for the most part of 2019, suffered another shock amid the pandemic. Manufacturing activities in the country dropped in the first quarter of 2020, impacted by shutdowns imposed by China authorities to contain the spread of the virus. However, manufacturing activities have picked up of late on a recovery in domestic demand. China’s official manufacturing purchasing managers’ index (PMI) clocked 50.6 in May. Notably, a reading above 50 indicates expansion.

Business activities in the construction sector also picked up pace in May. Moreover, China’s passenger car sales rose for the first time in almost a year in May as government stimulus measures revived consumer demand, signalling a rebound in the world’s biggest automobile market from the crisis wrought by coronavirus.

Oil Price Resurgence Bodes Well for U.S. Chemical Players

U.S. petrochemical makers have been enjoying the fruits of the abundance of low-cost North American feedstock. Affordable natural gas and ethane (derived from shale gas) has offered U.S. producers a compelling cost advantage over their Asian and European counterparts who use a more expensive, oil-based feedstock such as naptha.

However, the oil price collapse under the weight of the pandemic raised concerns regarding the sustainability of this advantage. On top of that, lower oil prices hurt demand for chemicals in the energy space, an important end market.

Nevertheless, the recent rebound in crude oil prices is a positive for the U.S. chemical industry. Oil prices regained some of the lost ground on the back of massive production cuts by OPEC and its allies, and hopes of a recovery in demand due to easing of lockdown measures globally.

After plunging into negative territory in April for the first time on record on coronavirus-led demand destruction and supply glut, U.S. West Texas Intermediate (WTI) crude recently touched $40-per-barrel mark. Brent crude, the global benchmark, has also risen sharply in recent weeks from the lows of April. The favorable crude pricing environment is likely to continue on improving demand and supply dynamics. Higher crude oil prices also bode well for chemical prices as they essentially move in sync with oil prices.

5 Chemical Stocks Worth Betting On

Chemical companies are grappling with demand slowdown and supply chain disruptions due to coronavirus. However, a recovery in China coupled with the gradual reopening of economies around the world is expected to usher in a better second half for these companies. As such, it would be prudent to zero in on stocks in the space that have healthy prospects.

We highlight the following five stocks, with a solid Zacks rank, that are good options for investment right now.

Flexible Solutions International Inc. (FSI - Free Report)

The Canada-based company currently carries a Zacks Rank #2 (Buy). It has expected earnings growth of 37.5% for the current year. The consensus estimate for the current year has been revised 22.2% upward over the last 60 days. The stock is also up roughly 12% over the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rayonier Advanced Materials Inc. (RYAM - Free Report)

This Florida-based company, carrying a Zacks Rank #2, has expected earnings growth of 49.5% for the current year. The Zacks Consensus Estimate for the current year has been revised 18% upward over the last 60 days. The company also has an expected long-term earnings per share growth rate of 35.5%. It has also seen its shares surge roughly 129% over the past three months.  

Stepan Company (SCL - Free Report)

Illinois-based Stepan currently has a Zacks Rank #2. It beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters by 19.6% on average. The Zacks Consensus Estimate for current-year earnings has gone up 9.5% in the last 60 days. Moreover, the company’s shares have rallied 34% over the past three months.

AdvanSix Inc. (ASIX - Free Report)

Based in New Jersey, AdvanSix carries a Zacks Rank #2. It delivered an average positive earnings surprise of 20.7% for the trailing four quarters. The consensus estimate for the current year also has been revised 4.8% upward over the last 60 days. The company’s shares have also surged around 73% over the past three months.

Green Plains Inc. (GPRE - Free Report)

The Nebraska-based company has a Zacks Rank #2. It has expected earnings growth of 46.1% for the current year. The company also delivered a positive earnings surprise of 20.7%, on average, over the trailing four quarters. Moreover, its shares have shot up around 71% over the past three months.

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