Chicago, IL - April 21, 2015 - Today, Zacks Equity Research discusses the Chemicals (Part 2), including PPG Industries Inc. ( PPG - Free Report ), Albemarle Corp. ( ALB - Free Report ), Air Products and Chemicals Inc. ( APD - Free Report ), Celanese Corp. ( CE - Free Report ) and LyondellBasell Industries NV ( LYB - Free Report ).
Industry: Chemicals (Part 2)
The recovery momentum for the chemical industry is expected to continue this year, backed by a strengthening U.S. economy, strength in the automotive space, healthy demand in emerging geographies and gradually convalescing construction markets.
Notwithstanding a few industry-related headwinds, weakness in Europe and slowdown in China, there are a number of reasons to be optimistic about the broader chemical industry for both the short and long haul, which we have highlighted below:
Shale Bounty Driving Chemical Projects
According to the American Chemistry Council (ACC), abundant shale gas production is 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. New methods of extraction such as horizontal drilling and hydraulic fracturing (or fracking) are boosting shale production, bringing down prices of ethane (derived from shale gas) in the process.
Leveraging the abundant natural gas supply, chemical makers are ratcheting up investment on shale gas-linked projects which is expected to beef up capacity and export moving ahead. The shale revolution made the U.S. an attractive investment location and incentivized a number of chemical companies to invest billions of dollars for setting up facilities (crackers) to produce ethylene and propylene in a cost-effective way.
According to an ACC report, domestic chemical investment related to shale gas has reached as high as $138 billion, most of which are from firms outside of the U.S. Already 225 projects -- many backed by Federal government support -- have been announced by chemical makers to take advantage of ample natural gas supplies. Such investments are expected to boost capacity and export over the next several years.
Automotive Kicks into High Gear
The automotive sector is one of the major consumers of chemicals and is witnessing significant momentum. Global automotive sales are expected to hit 88.6 million units this year (up 2.4% from 2014), according to IHS Automotive.
The U.S. auto industry also remains on top gear with new car and light truck sales rising to 16.4 million units in 2014 from 15.6 million last year. Sales are expected to further jump to 16.94 million units in 2015 on the back of low gasoline prices and pent-up consumer demand, as per The National Automobile Dealers Association (NADA) estimates.
In particular, U.S. light vehicles (a key end-user market) sales are expected to increase this year, riding on improving employment rate and household income, lower fuel prices, attractive financing options and pent-up demand. Auto industry in Asian countries, especially China, is also expected to thrive over the next several years. Lower oil and gas prices have also been a boon for automakers. As such, chemical makers are expected to gain from higher demand from this important end-market.
A number of chemical companies are shifting their focus on attractive, growth markets (driven by megatrends) in an effort to cut their exposure on other businesses that are struggling with weak demand and input costs pressure. In particular, agriculture and health and nutrition have emerged as a lucrative markets as evident from recent trends.
Moreover, cost-cutting measures -- including plant closures and headcount reduction -- and productivity improvement actions by chemical companies are expected to yield industry-wide margin improvements. Cash flows derived through these actions could be directed for growth initiatives. Several chemical makers are also disposing non-core assets as they shift their focus on high margin businesses.
M&A Heating Up
The chemical industry also saw a pick-up in consolidation activities in 2014. Chemical companies remain actively focused on mergers and acquisitions to diversify and shore up growth in a still-challenging economic environment. These companies continue to explore growth opportunities in the fast-growing emerging markets, particularly in the lucrative regions of Asia-Pacific and Latin America.
The chemical industry witnessed high levels of consolidation activities last year with some major deals have taken place including PPG Industries Inc.'s ( PPG - Free Report ) acquisition of Mexican paint company Comex and Albemarle Corp.'s ( ALB - Free Report ) $6.2 billion buyout of Rockwood Holdings, Inc.
Construction Springing Back to Life
A rebound across housing and commercial construction -- major chemical end-markets -- has been another supporting factor for the chemical industry recovery. After being hit hard in the recession, the construction industry is currently in the process of gradual healing.
The housing sector saw steady recovery in 2014 backed by stabilizing mortgage rates, improving job market and moderating home prices, and the momentum is expected to continue in 2015. While the U.S. housing market witnessed a slowdown of late with a sharp decline in housing starts in Feb 2015 due to harsh winter, a pick-up in housing activity is expected in the spring selling season.
Moreover, renewal of long-stalled construction projects and long awaited access to credit from lending institutions have helped invigorate the commercial construction sector. The US Architecture Billings Index (ABI), an indicator that offers a glimpse into the future of U.S. non-residential construction spending activity, remained above 50 for the most part of last year (a reading above 50 indicates an increase in billings). The index rose to 50.4 in Feb 2015 from 49.9 a month ago. This bodes well for demand for chemicals in the construction markets moving ahead.
The chemical industry is finally looking up after staying down for long, making it an attractive investment proposition for 2015. As you can see from the above-stated factors, there are a few good reasons to be optimistic about the industry.
Chemical stocks that are well placed in the current operating backdrop include Air Products and Chemicals Inc. ( APD - Free Report ), Celanese Corp. ( CE - Free Report ) and LyondellBasell Industries NV ( LYB - Free Report ).
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