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US Chemical May Output Slips as Coronavirus Crimps Supply Chains

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U.S. chemical production continued to retreat in May due to disruptions wrought by the coronavirus pandemic — according to the latest monthly report from the American Chemistry Council ("ACC").

The Washington, DC-based chemical industry trade group said that the U.S. Chemical Production Regional Index ("CPRI") slipped 2% in May on a monthly comparison basis, following a 2.7% drop a month ago and a 0.9% decline in March. The U.S. CPRI, which is measured using a three-month moving average, was created to track chemical production in seven regions nationwide.

Overall chemical production also fell 6% on a year-over-year comparison basis in May. This marked the 12th straight month of year-over-year decline. Production dropped across all regions, with West Coast, Ohio Valley and Midwest seeing the biggest declines.

The lower production in May is due to supply chain disruptions and continued restrictions across much of the country during the month, the trade group noted.

According to the ACC, overall activity for the U.S. manufacturing sector was down 6.2% in May on a three-month moving average basis with declines across all industry sectors. Several factories reopened in May as restrictions eased in many parts of the country.

The manufacturing sector serves as a barometer to gauge the overall health of the U.S. economy and has a major influence on the chemical industry. The sector is a major driver for the chemical industry which touches around 96% of manufactured goods. Manufacturing activity is also a key indicator for chemical production.

Broad-Based Decline in Regional Production  

The May reading showed lower production on a monthly comparison basis across all regions with Midwest and West Coast witnessing largest declines.

Production in the Gulf Coast — the epicenter of the U.S. specialty chemicals and petrochemicals industry — was off 1.9% in May. Output across Midwest and West Coast dropped 2.2% in the reported month. Production also fell 1.8% across Southeast and Northeast. Ohio Valley saw a 1.7% decline while output dipped 2% in Mid-Atlantic.

Chemical production also fell in all segments barring plastic resins. However, production of some chemical materials rose in May, including supply chains tied to personal protective equipment (PPE) and disinfection products.

U.S. Chemicals Stung by Coronavirus

U.S. chemical makers are buffeted by demand slowdown across major end-use markets including construction, automotive and electronics and supply chain disruptions due to the pandemic. Coronavirus-led shutdowns have paralyzed industrial and economic activities globally, hurting demand for chemicals.

The construction sector bore the brunt as certain projects were postponed or disrupted amid the outbreak. Disruptions in the supply chain and manpower shortages have also put a brake on automotive production. Moreover, a sharp decline in crude oil prices has hurt demand for chemicals in the energy space. The difficult demand environment is expected to persist in the near term amid a slowdown in industrial activities globally.

U.S. chemical producers are also grappling with short supply of raw materials as a result of coronavirus. American chemical makers procure several chemicals critical to their production processes from China that are not available elsewhere.

The closure of a large number of factories in China to stem the spread of the outbreak disrupted the global supply chain. This has affected the availability of key raw materials for the chemical industry and pushed up prices of these inputs. Some of the companies are also facing challenges arising from elevated logistics costs. The supply disruption is likely to continue to affect U.S. chemical production over the short haul.

Nevertheless, some of the chemical companies are benefiting from higher demand for chemicals and materials across industries like healthcare and packaging. With a surge in the number of coronavirus cases around the world, demand for health, hygiene and safety products (including PPEs, sanitizers, disinfectants and cleaning products) has skyrocketed. A number of chemical companies are ramping up production to address the surging demand for these products in these testing times. Some of them are even adjusting their production to make finished products including hand sanitizers. 

Chemical Stocks Worth a Look

A few stocks currently worth considering in the chemical space are Rayonier Advanced Materials Inc. (RYAM - Free Report) , AdvanSix Inc. (ASIX - Free Report) , Green Plains Inc. (GPRE - Free Report) and Flexible Solutions International Inc. (FSI - Free Report) , each currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rayonier Advanced Materials has expected earnings growth of 51.9% for the current year. The Zacks Consensus Estimate for the current year has been revised 21.8% upward over the last 60 days.

AdvanSix has delivered an average positive earnings surprise of 20.7% over the trailing four quarters. The consensus estimate for the current year also has been revised 4.8% upward over the last 60 days.

Green Plains has expected earnings growth of 52% for the current year. The company also delivered a positive earnings surprise of 23.1%, on average, over the trailing four quarters.

Flexible Solutions 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.

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