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Chemicals Witness a Solid Q2 With Strong Production Growth

Anindya Barman

Global chemical production continued its uptrend in the second quarter with May seeing a rise in production on gains across most regions, according to the recent monthly report from the American Chemistry Council (“ACC”).

May Sees Improved Production

The chemical industry trade group said that the Global Chemical Production Regional Index ("CPRI") rose 0.4% in May on a monthly comparison basis, an improvement from a 0.3% gain in April.

The ACC also noted that the Global CPRI went up 1.6% year over year on a three-month moving average basis.

The Global CPRI, which is measured using a three-month moving average, measures chemical production volumes for 33 major nations, sub-regions and regions. It is comparable to the Federal Reserve Board (“FRB”) production indices.

Capacity utilization for the global chemical industry moved up 0.2 percentage points to 83.1% in May. Utilization, however, fell from 84.7% a year ago.

By regions, May saw higher production across North America (up 0.5%), Latin America (up 0.2%), the Former Soviet Union (up 1.6%), Africa & the Middle East (up 0.1%) and the Asia-Pacific (up 0.6%). However, output fell in Europe (down 0.3%).

On a segment basis, growth was witnessed in bulk petrochemicals and organics, synthetic rubber, manufactured fibers, coatings and other specialties for the reported month. This was offset by softness across agricultural chemicals consumer products, inorganic chemicals and plastic resins.

Per the ACC, chemical production in the United States went up 0.4% in May on a monthly comparison basis, following a 0.2% rise a month ago. May saw an uptick in chemical production on a monthly comparison basis across all regions barring the Ohio Valley.

Chemical Industry Poised for Upside Amid Challenges

The chemical industry is among the industries that have been badly hit by the bitter year-long trade spat between the United States and China. Washington and Beijing levied billions of dollars in punitive tariffs on each others’ products last year. China’s list of U.S. goods hit with tariffs includes an array of petrochemicals, specialty chemicals and plastics.

The tariffs currently in place are doing damage to the chemical industry. China is among the largest export markets for U.S. chemicals. Beijing’s countermeasures have created an uncertain demand environment for U.S. chemical products in China. The tariffs are hurting U.S. chemical exports.

A downturn in the global economy, partly due to the trade tensions, is another concern for the chemical industry. Economic conditions have, in particular, weakened across emerging economies. Moreover, political uncertainties around Brexit and other concerns have led to a slowdown in the European economy.

Notwithstanding the headwinds, the chemical industry is poised for an upswing in 2019. In particular, the U.S. chemical industry is expected to run higher this year on the back of strength in major end-use markets and significant investment on capacity expansion.

The ACC expects the U.S. chemical industry to grow 2.5% in 2019. The trade group sees growth in important end-use markets to support the expansion of the industry. While the automotive sector is expected to remain at high levels, slow recovery in the housing market is expected to continue. Shale-linked Investments are also expected to drive growth in the U.S. chemical industry.

Chemical Stocks to Watch For

A few stocks currently worth considering in the chemical space are Israel Chemicals Ltd. ICL, Flexible Solutions International Inc. FSI, Axalta Coating Systems Ltd. AXTA, Air Products and Chemicals, Inc. APD and Innospec Inc. IOSP. Israel Chemicals, Flexible Solutions and Axalta Coating Systems sport a Zacks Rank #1 (Strong Buy), while both Air Products and Innospec carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Israel Chemicals has expected earnings growth of 13.5% for the current year. Earnings estimates for the current year have been revised 2.4% upward over the last 90 days.

Flexible Solutions has expected earnings growth of 342.9% for the current year. Earnings estimates for the current year have been revised 138.5% upward over the last 90 days.

Axalta Coating Systems has expected earnings growth of 35.2% for the current year. Earnings estimates for the current year have been revised 30% upward over the last 90 days.

Air Products has expected earnings growth of 10.3% for the current fiscal year. Earnings estimates for the current fiscal have been revised 0.5% upward over the last 90 days.

Innospec has expected earnings growth of 6.6% for the current year. Earnings estimates for the current year have been revised 3% upward over the last 90 days.

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