June quarter results continued to portray a persistently
challenging economic backdrop in Europe along with slow economic
activity in China, which weighed on demand for chemical products.
These factors together with weaknesses across some key end-markets
such as non-residential construction and electronics continued to
squelch a meaningful recovery in the chemical industry.
While higher taxes from fiscal cliff and the impact of
sequestration are weighing on domestic economic growth, the U.S.
has been a bright spot in the quarter with signs of a revival in
the housing market and improving consumer confidence. On the other
hand, the European economy continued to contract and growth in
China slowed in the second quarter.
While second-quarter results elicit signs of a recovery in the
chemical industry, a material turnaround is not expected in the
current quarter given the continued Eurozone problems.
Nevertheless, the industry is expected to fare relatively better in
the second half of 2013, aided by the gradual healing in the U.S.
economy and hopes of a rebound in Chinese demand.
The chemical industry is expected to benefit from strength across
emerging markets and a rise in shale gas production in the U.S.
Strength across automotive and aerospace and a recovery in the
housing market also augurs well for the industry in the second half
Chemicals are used to make consumer goods and are also used in the
agriculture, manufacturing, construction and service industries. In
fact, the chemical industry itself consumes 26% of its own output.
Major industrial consumers include rubber and plastic, textiles,
apparel, petroleum refining, pulp, paper and primary metals.
The chemical industry, a roughly $5 trillion global business, has
grown at a brisk pace for more than five decades. The
fastest-growing areas have involved the manufacture of synthetic
organic polymers used as plastics, fibers and elastomers. The
chemical industry is mainly concentrated in three areas of the
world: Western Europe, North America and Japan. Europe is the
largest producer, followed by the U.S. and Japan.
The U.S. chemical industry represents more than 15% of the global
chemical output and employs nearly 800,000 people. It constitutes
roughly 12% of the nation's exports, aggregating $187 billion
annually. Roughly 5.5 million additional jobs are backed by the
purchasing activity of the chemical industry. The U.S. chemical
industry supports roughly 25% of the nation's gross domestic
The chemical industry is cyclical by nature and heavily linked to
the overall condition of the U.S. and world economy. The Chemical
industry also touches 96% of manufactured goods, making the
manufacturing industry the biggest consumer of chemical products.
The manufacturing sector serves as a barometer to gauge the overall
health of the U.S. economy and is a major driver for the chemical
industry. However, uneven manufacturing activity during first-half
2013 has led to softer demand for chemicals.
There are 170 major chemical companies in the U.S. operating
internationally, with more than 2,800 facilities abroad. The
chemical industry is among the biggest industries in the U.S., a
roughly $770 billion enterprise. It has been consistently leading
the U.S. economy's business cycles due to its early position in the
According to chemical powerhouse
), global chemical production (excluding pharmaceuticals) rose 2.6%
in 2012, down from a 3.8% rise registered a year ago. The
deceleration resulted from slower demand for chemical products
compared with 2011, hindered by weak economic environment and
subdued growth across a number of emerging markets.
Within the Zacks Industry classification, the chemical industry
falls under the broader Basic Materials sector (one of 16 Zacks
sectors). We rank all of the more than 260 industries in the 16
Zacks sectors based on the earnings outlook for the constituent
companies in each industry. To learn more visit:
About Zacks Industry Rank
The way to look at the complete list of 260+ industries is that the
outlook for the top one-third of the list (Zacks Industry Rank of
#88 and lower) is positive, the middle 1/3rd or industries with
Zacks Industry Rank between #89 and #176 is neutral while the
outlook for the bottom one-third (Zacks Industry Rank #177 and
higher) is negative.
We have four chemicals related industries: Chemical Plastics,
Chemical Specialty, Chemical Diversified and Chemical Fibers. The
Chemical Fibers industry currently retains a Zacks Industry Rank
#119, placing it in the middle 1/3rd of the 260+ industry groups.
The Chemical Specialty industry is featuring in the bottom
one-third of all Zacks industries with a Zacks Industry Rank #181,
followed by the Chemical Diversified industry with a Zacks Industry
Rank #218 and Chemical Plastics with a Zacks Industry Rank #241.
Looking at the exact location of these industries, one could say
that the general outlook for the chemicals space as a whole is
leaning towards the negative side.
Sector Level Earnings Trends
Chemical industry falls under the broader Basic Material sector
which is expected to have a 3% share of total earnings for the
S&P 500 in 2013. The Basic Material sector had earnings beat
ratio (the percentage of companies coming out with positive
surprises) of 71.4% and revenue beat ratio of 19% in the first
Looking at the overall results of the Basic Material sector,
earnings dipped 1.8% in the first quarter of 2013, a disappointing
performance compared with the 13.2% rise in the previous quarter.
Total revenue decreased 2.1% in the first quarter versus a 1.3%
gain a quarter ago.
Based on the latest available information, 91.3% of the sector
participants have already reported June quarter results with
earnings and revenue beat ratios of 52.4% and 42.9%, respectively.
Total earnings for the companies that have reported so far have
shown a 12.1% year over year decline on a 1.6% fall in revenues.
Earnings for the Basic Material sector is expected to be down 11.9%
in the second quarter while revenues are forecast to fall 2%,
placing it among the laggards in a whole bunch of 16 sectors
covered by Zacks.
For the third quarter, earnings are expected to inch up 0.5% and
accelerate further by 13.6% in the fourth quarter. Revenues are
expected to edge up 0.4% in the third quarter and fall 2.4% in the
For more information about earnings for this sector and others,
please read our '
Key Feedstock Price Trends
The chemical industry uses oil, naphtha and natural gas as energy
and feedstock inputs. BASF report states that the price of Brent
crude oil averaged $112 a barrel in 2012 compared with $110 a
barrel a year ago. Prices rose sharply at the beginning of 2012,
stirred by the combined impact of higher demand and political
unrest in the Middle East.
Brent crude, which hit a four-year high of $128 a barrel in Mar
2012, reached a nine-month high of $119 in Feb 2013, triggered by
strong Chinese crude oil import data and geopolitical tension in
the Middle East, exacerbated by Iran's nuclear program.
Brent crude prices eased to below $100 in April 2013 for the first
time since July 2012 on weak demand outlook for oil. However, Brent
topped $110 a barrel for the first time since April recently on
upbeat U.S. manufacturing data for July and concerns over supply
disruption in the Middle East and Africa.
The price of the other key raw material, naphtha, which is produced
from oil, averaged $937 per metric ton in 2012 compared with $930
per metric ton in 2011. High crude prices kept the cost of naphtha
elevated. Natural gas remains a bright spot on the feedstock front.
The average annual price of natural gas in the U.S. dropped to $3
per million British thermal units (mmbtu) in 2012 from $4 mmbtu in
2011. In fact, natural gas spot price hit a ten-year low of $1.82
per mmbtu last April on a surge in supply.
Over the last five years, the U.S. natural gas markets have seen a
dynamic shift due to the emergence of a new source of energy, shale
gas, which exists in large quantities with sources close to many
big energy-intensive cities. Shale gas is not only desirable for
environmental reasons given its low carbon footprint relative to
oil or coal, but is at the same time cost-effective. Natural gas
price, which is currently hovering around $3.60 per mmbtu, is
expected to remain depressed on shale-driven cheaper natural gas
Chemical Industry Poised for a Recovery
The European debt crisis, weak U.S. manufacturing along with
sluggish activity in China and other key emerging markets led to
weak demand for chemical products in 2012. While lingering crisis
in Europe coupled with other industry-specific challenges continues
to pose downside risks, the global chemical industry is poised for
a recovery this year.
The American Chemistry Council (ACC), an industry trade group,
foresees national chemical output (excluding pharma) to rise 1.9%
in 2013 (following a 1.5% gain in 2012) and 2.3% in 2014. Strength
across light vehicle and aerospace markets bodes well for the
industry. U.S. chemical exports are expected to rise 4.7% this year
(up from 1.8% in 2012) and 6.6% in 2014, leading to an expansion in
The trade group expects global chemical industry output to grow
4.3% in 2013 and 4.7% in 2014. Chemical makers in the emerging
economies are expected to deliver a 7.5% production gain in 2013.
The ACC expects strong rise in capital spending in the coming
years, stemming from new investments in petrochemicals and
derivatives. Domestic chemical investment jumped 15.5% to around
$38.1 billion in 2012. The ACC envisions capital spending to reach
$64.5 billion by 2017. The shale gas boom is expected to drive
investment on plants and equipment in the U.S. A rebound across
emerging markets is expected to contribute to accelerated rise over
the next several years.
BASF expects global chemical production to recover this year on the
back of healthy gains in the emerging markets. It expects the U.S.
chemical industry to benefit from lower gas prices. Asia is
expected to show strong rise riding on strength across
construction, electronics and automotive industries. However,
output in Europe is expected to rise narrowly due to marginal gain
in industrial production.
However, in a recent release, the European Chemical Industry
Council (CEFIC) downwardly revised its production outlook for
European chemicals citing tough economic conditions in the region
and weak demand across automotive and construction markets.
CEFIC, which represents the European chemicals industry, now
expects chemical output to contract 1% in 2013 (versus a modest
increase of 0.5% expected earlier). European chemicals output
declined 1.5% in 2012. However, the association expects European
chemicals industry to return to a growth of 1.5% in 2014 on
stabilization of industrial production in Europe and a modest
uptick in exports.
According to the ACC, emerging market growth and abundant shale gas
should help drive 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 strong 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. ACC report
indicated that over 50 projects have been announced by the U.S.
chemical makers (representing capital investment of more than $40
billion) to take advantage of ample natural gas supplies. Such
investments are expected to boost capacity and export over the next
Further, 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.
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 (especially China and Brazil).
China is expected to see a recovery this year following a somewhat
soft 2012. Government stimulus actions coupled with efforts to
staunch inflation appears to bear fruit and exports to the U.S. and
other key markets are regaining momentum. An improved demand
outlook for China bodes well for the chemical industry in 2013.
Major chemical makers are increasingly focusing on businesses that
cater to agriculture and nutrition markets in an effort to cut
their exposure on other businesses (such as titanium pigment) 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 the growers across North and Latin America,
solid order book and healthy supply of seeds and crop protection
products represents the driving factors.
E.I. DuPont de Nemours & Co.
) is witnessing significant momentum in its agriculture business,
driven by higher volume and market share gains in seed genetics and
crop protection. Its Agriculture segment delivered healthy sales in
the June quarter boosted by higher seed pricing. The company
expects continued strong gain in agriculture in the second half
driven by new products and strength in Latin America. DuPont should
also benefit from synergies of Danisco acquisition and its
aggressive restructuring actions.
U.S. chemical giant
The Dow Chemical Company
) saw its profit skyrocket in the June quarter on strength in its
agriculture business, buoyed by higher demand for crop protection
products. While Dow still faces challenges in Western Europe, it is
benefiting from strong fundamentals in agriculture and food
The company is also leveraging its North American feedstock
advantage and its investments in the U.S. and Middle East are
focused on boosting this advantage. A string of innovative
products in its pipeline adds to its strength.
We have a bullish view on
Eastman Chemical Company
), which delivered better-than-expected results in the most recent
quarter and is well placed to benefit from its Solutia acquisition.
The company's diversified chemical portfolio and integrated and
diverse downstream businesses represent the pillars of strength. It
also benefits from business restructuring, cost-cutting measures
and increased capacity additions.
We also have a favorable view on
Air Products and Chemicals Inc.
). Strength across merchant and tonnage gases businesses coupled
with acquisitions helped it to rake in healthy sales gain in the
June quarter. Air Products benefits from a diverse customer base,
pricing power and cost-reduction measures. New business deals and
strategic investments are expected to support results this year. We
are also encouraged by the incremental opportunities in liquefied
natural gas (LNG) market.
In the specialty chemical space,
PPG Industries Inc.
) represents an attractive play. The company saw a healthy rise in
profit in the June quarter on strong results from its coatings
business and cost reduction initiatives. PPG Industries has a
diversified base of products and markets, and looks to grow its
businesses strategically along with controlling costs.
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. The turmoil 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 and the nagging impact of debt crisis.
The U.S. housing sector, a key consumer of chemicals, has shown
signs of recovery lately, manifested by rising housing starts,
increase in building permits and a steady pick-up in home prices.
However, demand from this industry remains way below the historic
levels. In addition, weakness still persists in commercial
construction and electronics, which are among the key end-markets.
Chemical companies generate a major chunk of their revenues outside
the U.S., and therefore are exposed to foreign exchange
fluctuations. Currency exchange translation remains a headwind for
Chemical makers may also face greater regulatory challenges.
Environmentalists as well as different consumer and industry groups
long argued that the existing Toxic Substances Control Act (TSCA),
administered by the U.S. Environmental Protection Agency (EPA), is
outdated and needs an overhaul. Sen. Frank Lautenberg along with
other co-sponsors introduced the Safe Chemicals Act of 2013 in
April 2013, which is geared to limit the use of toxic chemicals
linked to a broad range of diseases and place the burden on
chemical makers to prove that their chemicals are safe.
Commodity prices, though subsiding lately, still remain a concern
for many of the U.S. chemical producers. Their ability to pass
these costs on to end consumers is not always easy, given the
competitive pressures at play. As a result, margins for a number of
producers may continue to be under pressure.
Moreover, fertilizer and agricultural chemicals makers face
significant challenges following the exit of world's largest potash
maker Uralkali Group from one of the biggest potash cartels -- the
Belarus Potash Company (BPC). Uralkali's Board decided to end
export sales through BPC and direct all potash export through its
Switzerland-based trade arm Uralkali Trading.
BPC is one of the two largest cartels (along with North America's
Canpotex) that influence potash pricing by controlling the
production and supply. Uralkali's game-changing move has triggered
industry-wide fear of a price war which may push potash prices down
and put pressure on fertilizer makers.
) put up a tepid second quarter with both revenues and earnings
missing expectations. Celanese is witnessing weak demand and
pricing in its core acetyl business. Moreover, it is exposed to raw
material supply issues and currency headwinds and continues to face
challenges in Europe. A weak demand scenario coupled with
persistently challenging economic conditions may affect its results
in the back half of 2013.
We also hold a bearish view on
). Restricted supply of natural gas continues to hurt its
operations in Chile, Trinidad and Egypt, reflected by lower
production in the June quarter. Methanex may continue to face
headwinds due to curtailment of gas supply and constrained spending
across its end markets.
Specialty chemical company
) is faced with difficult market conditions and is seeing irregular
demand trends across a number of end-markets. It continues to
witness weak coatings demand for general industrial products. A
soft demand environment across some overseas markets is weighing on
Valspar's earnings outlook.
We are wary about the prospects for companies in the agricultural
chemical space in light of the recent Uralkali cartel exit event.
) is struggling with weak potash pricing. It saw a double digit
decline in average realized price of potash in the second quarter
as competitive pressure pulled down contract and spot market
prices. It cut its earnings forecast for the full year factoring in
the price decline. Weak potash demand in India, a key market, and
oversupply in the market is keeping potash prices under pressure.
Agricultural chemical company
) is also exposed to similar headwinds. Cold weather conditions and
pricing pressure led to a decline in its profit in the June
quarter. Agrium remains challenged by a soft pricing environment
and somewhat weak overseas demand for potash and phosphate. The
global phosphate market is expected to remain weak in the near
term, partly due to lower demand from India, a key phosphate import
AGRIUM INC (AGU): Free Stock Analysis Report
AIR PRODS & CHE (APD): Free Stock Analysis
BASF SE (BASFY): Get Free Report
CELANESE CP-A (CE): Free Stock Analysis Report
DU PONT (EI) DE (DD): Free Stock Analysis
DOW CHEMICAL (DOW): Free Stock Analysis Report
EASTMAN CHEM CO (EMN): Free Stock Analysis
METHANEX CORP (MEOH): Free Stock Analysis
POTASH SASK (POT): Free Stock Analysis Report
PPG INDS INC (PPG): Free Stock Analysis Report
VALSPAR CORP (VAL): Free Stock Analysis Report
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