The U.S. Chemical is witnessing continued investments, strengthening export markets and robust demand across key-end markets like electronics, automotive and construction.
These factors have helped the industry outpace the broader market over the past year despite many headwinds including sluggishness in China, weak demand in agriculture and damaging effects of the hurricanes.
The Zacks Chemicals Diversified industry has outperformed the broader market over a year. The industry has gained around 30.7% over this period, topping S&P 500’s corresponding return of roughly 21.5%.
Investments Continues to Drive Growth
The American Chemistry Council (ACC), an industry trade group, envisions national chemical production (excluding pharmaceuticals) to rise 3.7% in 2018 and 3.9% in 2019. Higher demand across light vehicles and housing markets, capital investments and improved export markets are like to drive growth.
According to the ACC, the United States remains a valuable destination for chemical investment and domestic chemical makers continue to enjoy the advantage of access to abundant and cheaper feedstocks and energy. This is driving investment in chemical production projects.
The trade group noted that roughly 320 chemical projects have been announced worth more than $185 billion, 62% of which is foreign direct investment. Moreover, roughly 65% of the chemical investment announced since 2010 are complete or under construction. New capacity is expected to provide a boost to chemical production as these investments come on stream.
The trade group expects capital spending in the chemical industry to rise 6.3% in 2018 and 6.8% in 2019 and eventually reach $48 billion by 2022.
Strong Export Markets Bode Well
The ACC expects improving export markets to contribute to solid growth of the domestic chemical industry. Strengthening export markets and increasing capital spending are driving chemical demand across key end-use markets such as light vehicles and housing. Housing activity is expected rise to 1.29 million in 2018 from 1.2 million in 2017.
Total chemical exports went up 4.9% to $127 billion in 2017 while imports rose 2.8% to $96 billion, the trade group noted.
The trade group also expects basic chemicals production to increase 4.7% in 2018 and 5.2% in 2019 on the back of new capacity additions. Major export markets such as Latin America and Asia are expected to play a significant role in production growth.
Robust Demand Across Key-End Markets
Chemical makers continue to see strong demand from construction and automotive sectors – major chemical end-use markets. A recovery across housing and commercial construction markets has been a tailwind for the chemical industry. The underlying trends in the housing space remain healthy, backed by steady buyer demand, low mortgage rates, high homebuilders’ confidence, low unemployment levels and rising rent costs.
The automotive sector also continues its bullish run amid certain challenges, supported by an improving job market, rising personal income, improved consumer confidence, low fuel prices, impressive vehicle launches and attractive financing options.
Last year, gains in specialty chemicals were led by improvements in adhesives, oilfield and mining chemicals and electronic chemicals. Production in the segment is expected to grow 2.3% in 2018.
Another positive for the industry is a recovery in demand in the energy space – a key chemical end-market that had been out of favor for a while. The recovery has been driven by the rebound in crude oil prices. The recent uptrend in oil prices has been supported by a decline in U.S. oil stockpiles and extension of oil production cuts by OPEC and other major world producers until the end of 2018. Improving fundamentals in the energy space is expected to support chemical demand next year.
4 Chemical Stocks to Scoop Up
The U.S. chemical industry’s upturn is expected to continue this year on the back of continued demand strength across major end-markets and significant capital investment. Amid such a backdrop, it would be a prudent idea to invest in chemical stocks with compelling growth prospects if you are looking to reap solid returns from your portfolio in 2018.
Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy), offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here. Further, we have refined our search by considering stocks that have outscored the industry on the basis of price appreciation over the year and also have promising long-term earnings growth expectations.
Kronos Worldwide, Inc. (NYSE:KRO), headquartered in Dallas, TX, currently sports a Zacks Rank #1 and a VGM Score of B. It has delivered average positive earnings surprise of 58.8% over the trailing four quarters. The stock has surged a whopping 105.5% over a year and also has a long-term expected earnings per share (EPS) growth rate of 5%.
Huntsman Corporation (NYSE:HUN), headquartered in The Woodlands, TX, carries a Zacks Rank #2 and a VGM Score of A. It has delivered average positive earnings surprise of 5.5% over the trailing four quarters. The stock has soared 72.6% over a year and also has a long-term expected EPS growth rate of 8%.
Methanex Corporation (NASDAQ:MEOH), the largest producer and supplier of methanol, carries a Zacks Rank #2 and a VGM Score of A. It has delivered average positive earnings surprise of 50.1% over the trailing four quarters. The stock has soared 61.3% over a year and also has a long-term expected EPS growth rate of 15%.
LyondellBasell Industries NV (NYSE:LYB), one of the largest chemicals, plastics and refining companies across the globe, carries a Zacks Rank #2 and a VGM Score of A. It has delivered average positive earnings surprise of 0.9% over the trailing four quarters. The stock has gained 32.5% over a year and also has a long-term expected EPS growth rate of 9%.
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