CHICAGO, April 14, 2014 /PRNewswire/ --Today, Zacks Equity Research discusses the Chemicals, including Dow Chemical Company (NYSE:DOW-Free Report), PPG Industries Inc. (NYSE:PPG-Free Report), Methanex Corp. (Nasdaq:MEOH-Free Report), DuPont (NYSE:DD-Free Report) and Celanese Corp. (NYSE:CE-Free Report).
Industry: Chemicals
Link: http://www.zacks.com/commentary/32131/chemical-industry-stock-outlook---april-2014
The chemical industry is poised for a recovery this year and the next. The American Chemistry Council (ACC), an industry trade group, foresees national chemical output (excluding pharma) to rise 2.5% in 2014 (up from a 1.6% increase in 2013) and further improve to a 3.5% gain next year. Growth will be backed by strong agricultural market fundamentals, healthy demand from light vehicles market and a recovery in the housing market manifested by increase in building permits and a steady pick-up in home prices.
U.S. chemical exports are expected to rise 6.6% this year and 7.6% in 2015, leading to continued generation of trade surplus. Trade in chemicals is expected to rise with a recovery in global manufacturing activities.
On the global front, ACC sees production to move up 3.8% in 2014 and 4.1% in 2015 with healthy gains expected across North America and emerging markets.
The ACC expects strong capital spending in the coming years, stemming from new investments in petrochemicals and derivatives. It envisions U.S. capital spending to reach $61.2 billion by 2018.
The shale gas boom is expected to drive investment on plants and equipment in the U.S. The ACC expects U.S. chemical revenues to surpass $1 trillion and the industry to rake in record trade surpluses by 2018, partly boosted by significant share gas-driven chemical capacity.
According to the European Chemical Industry Council (CEFIC), which represents the European chemicals industry, chemical output was flat year over year in Europe in 2013, modestly better than an expected 0.5% decline. Weak demand across automotive and construction markets remain as overhang, contributing to fragile recovery. Nevertheless, CEFIC expects recovery in the European chemicals industry to continue at a sluggish pace and sees a 1% rise in output in 2014, aided by an uptick in exports.
OPPORTUNITIES
Shale Boom Driving Chemical Investment
According to the ACC, emerging market growth and favorable oil-to-gas price ratios resulting from abundant shale gas production are driving U.S. chemical exports. A string of factors are driving growth in the export markets, including favorable energy costs stemming from the abundance of shale gas and healthy demand from the emerging markets.
Affordable natural gas and ethane (derived from shale gas) offer U.S. producers a compelling cost advantage over their global counterparts who use a more expensive, oil-based feedstock. New methods of extraction such as horizontal drilling and hydraulic fracturing are boosting shale production, bringing down prices of ethane in the process.
Leveraging the abundant natural gas supply and cost advantage, chemical companies are investing billions of dollars for setting up facilities (crackers) that produce ethylene from ethane. The U.S. has emerged as an attractive investment location and chemical makers are aggressively expanding capacity in the country.
A recent ACC report indicated that potential domestic chemical investment related to share gas has reached as high as $100 billion, more than 50% of which are from firms outside of the U.S. Already 148 projects -- backed by Federal government support -- have been announced by chemical makers to take advantage of ample natural gas supplies.
These projects may lead to $81 billion in new chemical industry output annually and 637,000 permanent new jobs by 2023. Such investments are expected to boost capacity and export over the next several years.
Agriculture: A Compelling Opportunity
Major chemical makers are increasingly shifting focus on businesses that cater to agriculture and nutrition markets in an effort to cut their exposure on other businesses that are grappling with weak demand and input costs pressure. In particular, agriculture is emerging as a lucrative market as evident from recent trends.
A healthy start in the North American growing season, strong planting activity by growers across North and Latin America, solid order book and healthy supply of seeds and crop protection products represent driving factors.
Strategic Actions
Mergers and acquisitions offer chemical companies another means to shore up growth in a still challenging economic scenario. These companies remain focused on exploring growth opportunities in the fast-growing emerging markets, particularly in the lucrative regions of Asia-Pacific and Latin America.
Moreover, cost-cutting measures implemented by chemical companies including plant closures and headcount reduction should yield industry-wide margin improvements. Cash flows derived through these actions can be used for growth.
Recovery in Chinese Demand
China, a major market, is expected to see a recovery in 2014. Government stimulus actions coupled with efforts to stem inflation appear to bear fruit and exports to the U.S. and other key markets are regaining momentum. An improved demand outlook for China augurs well for the chemical industry this year.
Stocks We Like
Chemical stocks that we like include The Dow Chemical Company (NYSE:DOW-Free Report), PPG Industries Inc. (NYSE:PPG-Free Report), Methanex Corp. (Nasdaq:MEOH-Free Report), DuPont (NYSE:DD-Free Report) and Celanese Corp. (NYSE:CE-Free Report). Dow and DuPont, in particular, are witnessing strong momentum in agriculture, driven by higher demand for crop protection products.
WEAKNESSES
Macro Headwinds
Persistent weakness in Europe and its impact on global growth remain sources of near-term uncertainty. Western Europe continues to pose challenges on chemical stocks due to weak demand. Given the industry's sensitivity to the global economy, any negative current in the macro economy would be reflected in the prospects of the chemical companies.
In addition, weakness still persists in commercial construction, which is among the key end-use markets. Demand from some of the major manufacturing industries remains below the historic levels.
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