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US Specialty Chemicals Lose Steam in February, Volumes Down

Anindya Barman
Investors need to pay close attention to Kala Pharmaceuticals (KALA) stock based on the movements in the options market lately.

The U.S. specialty chemical industry lost some momentum in February with volumes easing on a monthly comparison basis following gains in the previous two months, according to the latest report from the American Chemistry Council (“ACC”).

Per the Washington, DC-based chemical industry trade group, U.S. specialty chemicals market volumes fell 0.1% in February on a monthly comparison basis. This follows a 0.2% gain a month ago and a 0.4% increase in December. The data changes are reported on a three-month moving average basis.

Of the 28 specialty chemical segments monitored by the ACC, just 11 saw growth in February, down from 14 in January and 17 in December. Declines were witnessed across 13 markets while 4 were flat. During the reported month, large market volume growth (1% and over) was witnessed only in mining chemicals.

Per the ACC, the overall specialty chemicals volume index went up 4.4% on a year-over-year basis in February. Volumes were driven by year-over-year growth in 19 markets and functional specialty chemical segments. Oilfield chemicals notched up the strongest growth with volumes climbing 15.8%.

Industry Poised to Run Higher in 2019

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.

The specialty chemical industry is set for an upswing in 2019 on healthy demand in end-use markets such as construction, electronics, automotive and agriculture. In particular, the U.S. specialty chemical industry is expected to ride the growth wave this year on the back of higher industrial activities and rising end-market demand.

The ACC envisions growth in construction markets along with gains in manufacturing and exports to drive the specialty chemicals segments. The trade group expects the specialty chemicals segment to see production growth of 2.2% in 2019.

Improvement in oilfield chemicals, electronic chemicals, coatings, adhesives, cosmetic chemicals, and flavors and fragrances are fueling growth in specialty chemicals. The ACC expects demand for specialty chemicals to grow in sync with gains in industrial and construction sectors in the years ahead.

Trade Tariffs Remain a Worry

Specialty chemical companies are bearing the brunt of trade tariffs. Trade tensions between the United States and China have clouded the prospects of the U.S. specialty chemical industry.

Washington and Beijing imposed billions of dollars in punitive tariffs on each others’ products last year. China’s list of American goods hit with tariffs includes a wide range of chemical products including specialty chemicals. Although recent negotiations between the world’s two biggest economies have raised hopes of a possible resolution of the trade tiff, the tariffs currently in place are already doing damage to the industry.

Notably, China is one of the biggest export markets for U.S. chemicals and, thus, leaves the American chemical industry heavily exposed to Beijing’s countermeasures. The trade tariffs have created an uncertain demand environment for U.S. chemical products in China. Particularly, the trade friction has led to a slowdown in demand in the automotive market (a major specialty chemical end-use market) in China.

Specialty Chemical Stocks Worth a Wager

A few stocks currently worth considering in the specialty chemical space are Ingevity Corporation NGVT, W. R. Grace & Co. GRA, Israel Chemicals Ltd. ICL and Tronox Limited TROX. Ingevity sports a Zacks Rank #1 (Strong Buy), while W. R. Grace, Israel Chemicals and Tronox each carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingevity has an expected earnings growth of 17.9% for the current year. Earnings estimates for the current year have been revised 2.7% upward over the last 60 days.

W. R. Grace has an expected earnings growth of 10.4% for the current year. Earnings estimates for the current year have been revised 3.2% upward over the last 60 days.

Israel Chemicals has an expected earnings growth of 10.8% for the current year. Earnings estimates for the current year have been revised 5.1% upward over the last 60 days.

Tronox has an expected earnings growth of 50% for the current year. Earnings estimates for the current year have been revised 2.4% upward over the last 60 days.

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