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Manufacturing Rebound Drives US Specialty Chemicals: 4 Picks

Anindya Barman

The U.S. specialty chemical industry bounced back in August after a slowdown in July, according to the latest report from the American Chemistry Council (“ACC”). The rebound reflects a recovery in manufacturing production.

Positive August Readings

The Washington, DC-based chemical industry trade group said that U.S. specialty chemicals market volumes went up 0.2% in August on a monthly comparison basis. This follows a 0.1% decline a month ago. The data changes are reported on a three-month moving average basis.

Of the 28 specialty chemical segments monitored by the ACC, 18 saw growth in August (doubling from July) while decline was witnessed across seven markets. Large market volume growth (1% and over) was witnessed just for rubber processing chemicals during the reported month.

Per the ACC, the overall specialty chemicals volume index rose 0.8% on a year-over-year basis in August. Year-over-year comparisons, which have been on a decline since third-quarter 2018, improved in August. Volumes were up in 13 markets and functional specialty chemical segments in August while declining in 15 segments.

Specialty chemicals that include catalysts, surfactants, speciality polymers, coating additives and oilfield chemicals are used in specific fields based on their performance. They have application in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.

Manufacturing Recovery Instils Optimism

Prospects for the U.S. specialty chemical industry appear encouraging, driven by strength in the U.S. economy and healthy industrial activities. U.S. manufacturing activity hit a five-month high in September on the back of stronger new order growth, per IHS Markit. The initial reading of U.S. manufacturing Purchasing Managers’ Index (PMI) reached 51 in September, the highest since April.

U.S. industrial production increased 0.6% in August — the biggest gain in a year — following a 0.1% drop in July. Moreover, manufacturing production rebounded in August clocking a 0.5% gain after a 0.4% fall in July. Factory output rose 0.2% on average over May-Aug period after witnessing average 0.5% decline during January to April. The rebound is manufacturing production augurs well for the U.S. specialty chemical industry.

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.

Tariffs Remain a Drag

The year-long trade spat between the United States and China has taken its toll on a bevy of industries and the specialty chemical industry is no exception. The United States and China had imposed billions of dollars in punitive tariffs on each others’ products last year. China’s tariffs on American products include a wide swath of petrochemicals, specialty chemicals and plastics.

Adding to the woes, the Trump administration last month reignited trade conflict with China by announcing new 10% tariffs on an additional $300 billion worth of Chinese exports not already covered by earlier rounds of tariffs.

In response, China retaliated by slapping 5% to 10% tariff on $75 billion of U.S. imports, some of which took effect on Sep 1. The second phase of tariffs is slated to be effective Dec 15.

The United States hit back by raising the tariffs on $300 billion of Chinese goods from 10% to 15%, some of which went into effect on Sep 1. The U.S. administration also increased tariff to 30% from the existing 25% on $250 billion in Chinese imports.

The earlier rounds of tariffs currently in place are already doing harm to the U.S. chemical industry. China is among the most important trading partners of the American chemical industry and is one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory tariffs are hurting U.S. chemical exports and the competitiveness of the American chemical industry. The Sino-U.S. trade conflict has also led to a slowdown in industrial activities across Asia and Europe, hurting demand for chemicals.

The new round of tariffs will further hurt the U.S. chemical industry. The ACC had earlier noted that the total value of U.S. chemicals and plastics imports from China subject to tariffs would reach $26.4 billion should the new round of tariffs come into effect.

Nevertheless, in a positive development, China recently said that it would exempt some U.S. products from a recent round of additional tariffs. The United States also agreed to delay a planned increase in tariffs on some Chinese imports. While the countries prepare for another round of negotiations next month, a potential trade truce will provide a much-needed respite for the U.S. chemical industry.

Specialty Chemical Stocks to Buy

The specialty chemical industry is bearing the brunt of trade tariffs. However, continued demand in major end-use markets such as automotive, construction and energy should act as a catalyst for the industry.

Notably, rising housing construction activities, especially in Asia, and higher automotive production is driving demand for paints and coatings. Moreover, an ever-growing world population and the concomitant need to beef up food supply to feed more mouths remains a prime catalyst for growth in demand for agricultural chemicals. Higher exploration and drilling activities globally to address rising energy needs are also pushing up demand for oilfield chemicals.

The favorable August volume data also bodes well for the U.S. specialty chemical industry. The rebound in manufacturing activity should act as a tailwind.

We highlight the following four specialty chemical stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are worth considering for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.

NewMarket Corporation NEU

Based in Virginia, NewMarket sports a Zacks Rank #1. The company has expected earnings growth of 16.2% for the current year. Earnings estimates for the current year have been revised 10.4% upward over the last 60 days. The stock is also up around 16% year to date.

Axalta Coating Systems Ltd. AXTA

Our next pick in the space is Pennsylvania-based Axalta carrying a Zacks Rank #2. The company has expected earnings growth of 39.8% for the current year. Earnings estimates for the current year have been revised 1.7% upward over the last 60 days. The company also delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 24.9%. The stock is also up around 31% so far this year.

Valvoline Inc. VVV

Kentucky-based Valvoline carries a Zacks Rank #2. The company has expected earnings growth of 3.1% for the current fiscal year. Earnings estimates for the current fiscal have been revised 1.5% upward over the last 60 days. The stock is also up around 13% year to date.

Israel Chemicals Ltd. ICL

Tel Aviv-based Israel Chemicals carries a Zacks Rank #2. It has an expected earnings growth of 13.5% for 2019. The company also delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 12.8%.

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