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US Chemical Output Ticks Up in July on Manufacturing Rebound

U.S. chemical production expanded in July on gains in output across all chemical producing regions, according to the recent 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") rose 0.8% in July on a monthly comparison basis, following a 1.6% drop a month ago and a 2% decline in May. The U.S. CPRI, which is measured using a three-month moving average, was created to track chemical production in seven regions nationwide.

According to the ACC, recovery strengthened for the U.S. manufacturing sector with overall factory activities rising 4.9% in July on a three-month moving average basis. Broad-based improvement was witnessed across industry segments in the reported month. July saw gains in the output of appliances, motor vehicles, aerospace, computers, semiconductors, construction supplies, food & beverages, fabricated metal products, refining, iron & steel, foundries, plastic products, rubber products, tires, structural panels, furniture, printing, textile mill products and apparel.

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 and demand.

Meanwhile, overall chemical production fell 5.9% on a year-over-year comparison basis in July, per the ACC. This marked the 14th straight month of year-over-year declines. However, it reflects an improvement over the past several months.

Broad-Based Rise in Regional Production

The July reading showed higher production on a monthly comparison basis across all regions with Gulf Coast, Midwest and Ohio Valley witnessing biggest gains.

Production in the Gulf Coast — the epicenter of the U.S. specialty chemicals and petrochemicals industry — went up 1.4% in July. Output across Midwest and Ohio Valley ticked up 0.8% in the reported month. Production also rose 0.6% and 0.5% in Mid-Atlantic and Southeast, respectively, while West Coast saw a 0.4% gain.

Chemical production also rose in many segments in July. These include plastic resins, chlor-alkali, organic chemicals, industrial gases, synthetic dyes and pigments, consumer products and fertilizers. However, declines were witnessed across adhesives, coatings, other specialty chemicals, crop protection, synthetic rubber and manufactured fibers.

Resumption of Business Activities Augur Well

The U.S. chemical industry, which reeled under the effects of the tariff war between the United States and China last year, received yet another heavy blow from the coronavirus pandemic. Shutdowns and travel restrictions to curb the spread of infection paralyzed industrial and economic activities, leading to a slump in demand for chemicals across major markets including construction and automotive for much of the first half of 2020.

However, major parts of the United States have reopened for business after coronavirus-induced restrictions. Notably, the U.S manufacturing sector is gaining momentum on a recovery in the overall economy. The rebound in manufacturing activities bode well for the U.S. chemical industry.

Moreover, U.S. automakers started resuming production in May following a nearly two-month shutdown due to coronavirus. Automakers are ramping up production to normal levels in an effort to boost lagging vehicle inventories at dealerships. Resumption of several projects that were stalled earlier due to coronavirus-induced disruptions is also expected to support the revival in the U.S. construction sector. As these major markets recover, demand for chemicals is expected to go up moving ahead.

Meanwhile, chemical makers 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 Koppers Holdings Inc. KOP, Hawkins, Inc. HWKN, Valvoline Inc. VVV, PPG Industries, Inc. PPG and Kronos Worldwide, Inc. KRO. While both Koppers and Hawkins sport a Zacks Rank #1 (Strong Buy), Valvoline, PPG Industries and Kronos Worldwide each carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Koppers has delivered an earnings surprise of 25.1%, on average, over the trailing four quarters. The Zacks Consensus Estimate for the current year also has been revised 42.8% upward over the last 60 days.

Hawkins has expected earnings growth of 21.4% for the current fiscal year. Moreover, the consensus estimate for the current fiscal has been revised 7.7% upward over the last 60 days.

Valvoline has surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 19.2%. The consensus estimate for the current year also has been revised 5.3% upward over the last 60 days.

PPG Industries has delivered an earnings surprise of 13.1%, on average, over the trailing four quarters. The Zacks Consensus Estimate for the current year also has been revised 15.3% upward over the last 60 days.

Kronos Worldwide has delivered an earnings surprise of 79.4%, on average, over the trailing four quarters. Moreover, the consensus estimate for the current year has been revised 55.6% upward over the last 60 days.

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