Zacks Industry Outlook Highlights: Dow Chemical, Sherwin-Williams, Eastman Chemical, Celanese and LyondellBasell Industries
CHICAGO, Dec. 18, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Chemicals, part 2, including Dow Chemical Company (NYSE:DOW-Free Report), Sherwin-Williams Company (NYSE:SHW-Free Report), Eastman Chemical Company (NYSE:EMN-Free Report), Celanese Corp. (NYSE:CE-Free Report) and LyondellBasell Industries NV (NYSE:LYB-Free Report).
Industry: Chemicals, part 2
Link: http://www.zacks.com/commentary/36174/should-you-bet-on-a-chemical-industry-recovery
The chemical industry is expected to continue its recovery into 2015, backed by strong momentum in the automotive space in North America, healthy demand in emerging geographies and significant capital investments. A gradually convalescing housing market also augurs well for the industry's recovery prospects.
Although a few industry-related challenges, weakness in Europe and slowdown in China remain sources of near-term uncertainties, there are a number of reasons to be optimistic about the broader chemical industry for both short and the long haul, which we have highlighted below:
Shale Bounty Driving Chemical Spending
According to the ACC, emerging market growth and abundant shale gas production are driving U.S. chemical exports. A string of factors are driving growth in the export markets, including favorable energy costs stemming from the abundance of shale gas and healthy demand from the emerging markets. New methods of extraction such as horizontal drilling and hydraulic fracturing (or fracking) are boosting shale production, bringing down prices of ethane (derived from shale gas) in the process.
Leveraging the abundant natural gas supply and cost advantage, chemical makers are ramping up investment on shale gas-linked projects which is expected to beef up capacity and export moving ahead. The U.S. has emerged as an attractive investment location and chemical companies are investing billions of dollars for setting up facilities (crackers) that produce ethylene from ethane.
According to an ACC report, domestic chemical investment related to share gas has reached as high as $135 billion, most of which are from firms outside of the U.S. Already over 215 projects – many backed by Federal government support -- have been announced by chemical makers to take advantage of ample natural gas supplies. Such investments are expected to boost capacity and export over the next several years.
Automotive Picking Up Speed
The automotive sector is one of the major consumers of chemicals and is witnessing significant momentum. Global automotive sales are expected to hit 85 million units this year (up from around 82.84 million in 2013), according to IHS Automotive.
The U.S. auto industry also remains on top gear with new car sales are expected to rise to 16.4 million units in 2014 from 15.6 million last year and further jump to 16.94 million next year, as per The National Automobile Dealers Association (NADA) estimates.
In particular, U.S. light vehicles (a key end-use market) sales are expected to increase this year and 2015 riding on improving employment rate and household income, lower fuel prices, attractive financing options and pent-up demand. Auto industry in Asian countries, especially China, is also expected to thrive over the next several years. As such, chemical makers are expected to gain from higher demand from this important end-market.
Strategic Growth Measures
Major chemical makers are increasingly shifting their focus on attractive, growth markets (driven by megatrends) in an effort to reduce their exposure on other businesses that are struggling with weak demand and input costs pressure. In particular, agriculture and health and nutrition have emerged as a lucrative markets as evident from recent trends.
Moreover, cost-cutting measures implemented by chemical companies -- including plant closures and headcount reduction -- are expected to yield industry-wide margin improvements. Cash flows derived through these actions could be directed for growth initiatives. Several chemical makers are also divesting non-core assets as they shift their focus on high margin businesses.
M&A Heating Up
The chemical industry has also seen a pick-up in consolidation activities this year. Chemical companies remain actively focused on mergers and acquisitions to diversify and shore up growth in a still challenging economic environment. These companies continue to explore growth opportunities in the fast-growing emerging markets, particularly in the lucrative regions of Asia-Pacific and Latin America.
Construction Coming Back to Life
A rebound across housing and commercial construction -- major chemical end-markets -- has been another supporting factor for the chemical industry recovery this year. After being hit hard in the recession, the construction industry is currently in the process of gradual healing. An uptrend in the housing activity (including new home starts) has been witnessed over the past few quarters.
The housing sector has seen steady recovery in the second half this year backed by stabilizing mortgage rates, improving job market and moderating home prices, and the momentum is expected to continue in 2015. Renewal of long-stalled construction projects and long awaited access to credit from lending institutions have also helped invigorate the commercial construction sector in recent months. This bodes well for demand for chemicals in these markets moving ahead.
Wrapping Up
The chemical industry is finally on the path to recovery after being in a rut for long, making it an attractive investment proposition for 2015. As you can see from the above-stated factors, there are a few good reasons to be optimistic about the industry.
Chemical stocks that we like include The Dow Chemical Company (NYSE:DOW-Free Report), PPG Industries Inc., The Sherwin-Williams Company (NYSE:SHW-Free Report), Eastman Chemical Company (NYSE:EMN-Free Report), Celanese Corp. (NYSE:CE-Free Report) and LyondellBasell Industries NV (NYSE:LYB-Free Report).
Check out our latest Chemical Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector.
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