Zacks Industry Outlook Highlights: Dow Chemical, LyondellBasell Industries, BASF, Eastman Chemical And Celanese

For Immediate Release

Chicago, IL – August 10, 2016 – Today, Zacks Equity Research discusses Chemicals, Part 1, including Dow Chemical (NYSE:DOW) (DOW), LyondellBasell Industries (LYB), BASF (BASFY), Eastman Chemical ( EMN) and Celanese (CE).

Industry: Chemicals, Part 1

Link: https://www.zacks.com/commentary/88001/chemical-industry-stock-outlook---aug-2016

The chemical industry is still in gradual recovery mode from the trough of the Great Recession. Despite a spate of headwinds, the highly cyclical industry fared reasonably well in the first half of the year, helped by continued strength across automotive and housing markets -- two major end-use markets for chemicals.

Chemical companies are increasingly looking for cost synergy opportunities and enhanced operational scale through consolidations amid nagging macroeconomic challenges. These companies also remain actively focused on increasing their reach in high-growth markets in a bid to cut their exposure to businesses that are struggling with depressed demand. Strategic measures including cost management and productivity improvement also remain the prime focus of these companies to stay afloat in a still-difficult global economic backdrop.

Some industry-specific challenges, the Eurozone’s feeble recovery and concerns over China’s future growth remain sources of near-term uncertainties for the chemical industry. Moreover, chemical makers are also feeling the bite of weak demand in the energy markets amid a still depressed oil price environment. A strong dollar is also hurting U.S. chemical exports, reducing their attractiveness in overseas markets.

Lingering weakness in China -- a key market for chemicals -- is expected to remain a major drag on the chemical industry in the short haul. A persistent credit crunch, overcapacity and weak infrastructure and manufacturing investment are hurting the world’s second-largest economy.

In addition, the outlook for the fertilizer and agricultural chemicals space remains cloudy due to sluggish economic conditions in certain developing markets, particularly Brazil.

Notwithstanding these challenges, the chemical industry is expected to continue to recuperate through the balance of 2016, supported by continued strength in the light vehicles market, positive trends in the construction space and significant shale-linked capital investment.

Prospects Look Healthy in the U.S., but EU Stuck in a Rut

The U.S. chemical industry is poised for growth this year and the next despite several challenges including a strong dollar and a difficult oil price environment. According to the American Chemistry Council (ACC), an industry trade group, U.S. chemical production will rise 1.6% in 2016 and 3.7% in 2017. Barring production of the pharmaceuticals segment, output is expected to go up 2.7% this year and 4.1% in 2017.

In particular, the trade group expects basic chemicals production to expand 3.1% in 2016 and 4.9% in 2017. Chemical production is also expected to increase across all regions of the country this year.

The ACC envisions the U.S. chemical industry to continue to gather momentum over the next several years on the heels of new capital investments, capacity additions and feedstock cost advantage, and even transcend the nation’s overall economic growth in the long term.

The shale gas bounty and ample supply of natural gas liquids has been a huge driving force behind chemical investment on plants and equipment in the U.S. and have provided domestic petrochemicals producers a compelling cost advantage over their global counterparts. The ACC expects this competitiveness to drive export demand and new capital investment in the country.

The shale revolution has made the U.S. an attractive investment hotspot. Chemical makers including Dow Chemical (DOW), LyondellBasell Industries (LYB), BASF (BASFY), Eastman Chemical (EMN) and Celanese ( CE) are investing heavily on shale gas-linked projects to take advantage of abundant natural gas supplies which is expected to boost capacity and export over the next several years. The ACC expects domestic chemical industry capital spending to increase 10.4% in 2016 and 7.8% in 2017.

Outlook for the European chemical industry, on the other hand, looks tepid given sustained sluggishness in the region. The Eurozone economy remains stuck in an insipid recovery, manifested by a paltry growth of 0.3% in the second quarter of 2016 (according to preliminary estimates published by Eurostat). The region’s economic growth, in the short run, is likely to be stymied by Brexit-induced political and economic uncertainties.

Chemical makers in the European Union remain affected by lower prices, relatively higher energy and feedstock costs and a challenging regulatory landscape. According to the European Chemical Industry Council (CEFIC), chemical output in the European Union contracted 0.7% year over year in the first four months of 2016 with chemical prices falling 3.8% for the period. Chemical production in the region rose just 0.6% last year.

CEFIC expects a modest growth of roughly 1% in chemical output in both 2016 and 2017. Healthy domestic demand coupled with tailwinds from a strong construction end-use market are expected to be offset by sluggish demand for European chemical exports due to a challenging global environment.

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