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Global Chemical Output Leaps As Industry Rides on High Demand

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Global chemical production kicked off the third quarter on a positive note with output rising in July, according to the latest American Chemistry Council (“ACC”) report. Production rose across all regions barring Latin America in the reported month.

Positive July Numbers

The Washington, DC-based chemical industry trade group said that the Global Chemical Production Regional Index (“CPRI”) went up 1.2% in July on a monthly comparison basis. This follows a 2% increase in June. The rise in production came following the weakness witnessed during a couple of months in the spring.

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 production indices.

July readings were positive with respect to segments. Production went up 1.2% in basic chemicals and 1.1% in agricultural chemicals. Output rose 1.2% in specialty chemicals while consumer products witnessed a 1.3% growth in July.

The ACC also noted that the Global CPRI climbed 17.5% year over year on a three-month moving average basis in July. Global capacity ticked up 0.2% for the reported month and expanded 2.3% on a year-over-year basis. Capacity utilization for the global chemical industry also increased 1.5 percentage points to 90.7% in July on the back of higher production.

Strong Demand Buoy Chemicals Amid Supply-Chain Woes

The chemical industry has rebounded from the coronavirus-led downturn on a recovery in industrial demand. The industry bore the brunt of demand shocks for much of the first half of last year as global industrial activities were put to a halt amid the pandemic. Containment measures by governments across the globe to stem the spread of infection paralyzed industrial activities and gutted demand for chemicals across the major end-use markets.

However, with the easing of restrictions on business activities globally and an economic rebound in China — a top consumer of chemicals — demand for chemicals started to pick up from the third quarter of 2020. The upturn in demand is being driven by an upswing in manufacturing and industrial activities globally.

Chemical makers are benefiting from a strong rebound in demand in key end-use markets including automotive, building & construction and electronics. Healthy demand in automotive and construction is driving their volumes as witnessed in the second quarter of 2021. These companies saw higher demand from the automotive market in the quarter notwithstanding the semiconductor shortage which continues to affect automotive production globally. Some of them racked up record earnings in the second quarter on the back of strong demand. However, the spread of the highly contagious Delta variant may impact business activities and create demand headwinds over the near term.

Chemical producers are also grappling with raw material cost inflation as well as higher supply chain and logistics costs. Supply chain disruptions due to coronavirus and weather-related events have led to a spike in raw material costs. Higher input costs partly due to the impacts from the devastating winter storm in the U.S. Gulf Coast weighed on margins of chemical companies in the June quarter. Supply tightness continues for a number of key raw materials including several resins, propylene, butadiene and glass fiber.

The lingering impacts of supply chain and logistic bottlenecks, exacerbated by the recent unfavorable weather events globally and the resurgence of coronavirus infections, are expected to continue over the short term. Shutdowns associated with Hurricane Ida may also further squeeze the supply of raw materials. However, actions to raise the selling prices of chemical products to counter cost inflation are likely to help the chemical industry in sustaining margins through the second half.

Chemical Stocks Worth a Look

A few stocks currently worth considering in the chemical space are BASF SE BASFY, Olin Corporation OLN, AdvanSix Inc. ASIX, Avient Corporation AVNT and Dow Inc. DOW. While BASF, Olin, AdvanSix and Avient sport a Zacks Rank #1 (Strong Buy), Dow carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BASF has an expected earnings growth rate of 96.7% for the current year. The Zacks Consensus Estimate for the current year has also been revised 35% upward over the last 60 days.

Olin has an expected earnings growth rate of 590.4% for the current year. The consensus estimate for current-year earnings has been revised 21.2% upward over the last 60 days.

AdvanSix has an expected earnings growth rate of 160.4% for the current year. The Zacks Consensus Estimate for the current year has been revised 34.7% upward over the last 60 days.

Avient has an expected earnings growth rate of 75.1% for the current year. The consensus estimate for the current year also has been revised 6.7% upward over the last 60 days.

Dow has an expected earnings growth rate of 403% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 17.9% upward over the last 60 days.


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