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US Chemical Production Dips In August On Broad-Based Declines

By Zacks Investment ResearchStock MarketsSep 30, 2019 07:43AM ET
US Chemical Production Dips In August On Broad-Based Declines
By Zacks Investment Research   |  Sep 30, 2019 07:43AM ET
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U.S. chemical production dropped in August on a monthly comparison basis with lower output witnessed across all chemical producing regions, particularly in Northeast and West Coast – according to the latest monthly report from the American Chemistry Council ("ACC"). Activity for the U.S. manufacturing sector – the largest consumer of chemical products – rose modestly in August.

The Washington, DC-based chemical industry trade group said that the U.S. Chemical Production Regional Index ("CPRI") went down 0.3% in August on a monthly comparison basis, following a 0.7% decline a month ago. The U.S. CPRI, which is measured using a three-month moving average, was created to track chemical production in seven regions nationwide.

Overall chemical production also fell 2.5% on a year over year comparison basis in August with all regions seeing lower output. Biggest declines were witnessed across Gulf Coast, Midwest and Mid-Atlantic regions.

August Data Shows Lower Regional Output

The August reading showed a decline in chemical production on a monthly comparison basis across all regions. Production in the Gulf Coast – the epicenter of the U.S. specialty chemicals and petrochemicals industry – was down 0.1% in the reported month. Production also fell 0.4% across Midwest and Mid-Atlantic. Ohio Valley witnessed a 0.2% decline while output was down 0.3% in Southeast. Northeast (down 0.7%) and West Coast (down 0.5%) saw the biggest declines in the reported month.

By segments, chemical production was mixed. Gains in plastic resins, chlor-alkali and pesticides were neutralized by lower production in synthetic rubber, coatings, fertilizers, consumer products, organic chemicals, synthetic dyes and pigments, industrial gases, adhesives, manufactured fibers and other specialty chemicals.

U.S. Manufacturing Activity Ticks Up

According to the ACC, activity for the U.S. manufacturing sector edged up for a second straight month in August, rising 0.2%.

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. Manufacturing activity is also a key indicator for chemical production.

Within the manufacturing sector, production rose in several chemistry end-user markets in August including food and beverages, appliances, motor vehicles and parts, aerospace, construction supplies, fabricated metal products, computers, semiconductors, petroleum refining, oil & gas extraction, plastic products and rubber products.

Hefty Tariffs, Slowing Demand Weigh On Chemicals

The U.S. chemical industry is bearing the brunt of the prolonged trade conflict between the United States and China. Washington and Beijing levied billions of dollars in punitive tariffs on each others’ products last year. China’s tariffs on American products include a vast range of petrochemicals, specialty chemicals and plastics.

Adding to the worries, the Trump administration last month re-escalated the trade conflict by slapping new 10% tariffs on an additional $300 billion worth of Chinese exports not already covered by earlier rounds of tariffs. China retaliated by imposing 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 also 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 demand for U.S. chemical exports.

Per the ACC, China's retaliatory tariffs on $11 billion worth of imports of chemicals and plastics from the United States to date has led to U.S. exports of these products to decline 24% from December 2017 to December 2018. The new round of tariffs will further hurt the U.S. chemical industry.

The trade tiff has also led to a slowdown in industrial activities across Asia and Europe, hurting demand for chemicals. In particular, chemical makers are seeing demand weakness in China associated with the trade war amid a slowing Chinese economy. Notably, the trade friction has led to a slowdown in demand in the automotive market (a major chemical end-use market) in China.

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

Notwithstanding trade tensions and global growth concerns, the U.S. chemical industry is poised for an upside in 2019. The ACC had earlier said that it envisions 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.

The ACC expects strong gains in production in organic chemicals, inorganic chemicals and other specialty chemicals in 2019, partly masked by modest declines in production of agricultural chemicals and consumer products.

Chemical Stocks Worth a Look

A few stocks currently worth considering in the chemical space are NewMarket Corporation (NYSE:NEU) , Israel Chemicals Ltd. (NYSE:ICL) , Valvoline Inc. (NYSE:VVV) and Shin-Etsu Chemical Co., Ltd. (OTC:SHECY) . NewMarket sports a Zacks Rank #1 (Strong Buy), while Israel Chemicals, Valvoline and Shin-Etsu Chemical carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NewMarket 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.

Israel Chemicals 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%.

Valvoline 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.

Shin-Etsu Chemical has expected earnings growth of 2.5% for the current fiscal. Earnings estimates for the current year have increased 8.4% over the last 60 days.

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US Chemical Production Dips In August On Broad-Based Declines

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US Chemical Production Dips In August On Broad-Based Declines

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