Zacks Industry Outlook Highlights: E.I. DuPont de Nemours, Dow Chemical, Eastman Chemical, Air Products and Chemicals and PPG Industries

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Aug 21, 2013, 09:30 ET

CHICAGO, Aug. 21, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Chemicals, including E.I. DuPont de Nemours & Co. (NYSE:DD-Free Report), The Dow Chemical Company (NYSE:DOW-Free Report), Eastman Chemical Company (NYSE:EMN-Free Report), Air Products and Chemicals Inc. (NYSE:APD-Free Report) and PPG Industries Inc. (NYSE:PPG-Free Report).

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Industry: Chemicals

Link: http://www.zacks.com/commentary/28649/Chemical-Industry-Stock-Outlook---Aug-2013

According to the American Chemistry Council (ACC), emerging market growth and abundant shale gas should help drive 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 strong demand from the emerging markets.

Affordable natural gas and ethane (derived from shale gas) offer U.S. producers a compelling cost advantage over their global counterparts who use a more expensive, oil-based feedstock. New methods of extraction such as horizontal drilling and hydraulic fracturing are boosting shale production, bringing down prices of ethane in the process.

Leveraging the abundant natural gas supply and cost advantage, chemical companies are investing billions of dollars for setting up facilities (crackers) that produce ethylene from ethane. ACC report indicated that over 50 projects have been announced by the U.S. chemical makers (representing capital investment of more than $40 billion) to take advantage of ample natural gas supplies. Such investments are expected to boost capacity and export over the next several years.

Further, cost-cutting measures implemented by chemical companies including plant closures and headcount reduction should yield industry-wide margin improvements. Cash flows derived through these actions can be used for growth.

Mergers and acquisitions offer chemical companies another means to shore up growth in a still challenging economic scenario. These companies remain focused on exploring growth opportunities in the fast-growing emerging markets, particularly in the lucrative regions of Asia-Pacific and Latin (especially China and Brazil).

China is expected to see a recovery this year following a somewhat soft 2012. Government stimulus actions coupled with efforts to staunch inflation appears to bear fruit and exports to the U.S. and other key markets are regaining momentum. An improved demand outlook for China bodes well for the chemical industry in 2013.

Major chemical makers are increasingly focusing on businesses that cater to agriculture and nutrition markets in an effort to cut their exposure on other businesses (such as titanium pigment) that are grappling with weak demand and input costs pressure. In particular, agriculture is emerging as a lucrative market as evident from recent trends.

A healthy start in the North American growing season, strong planting activity by the growers across North and Latin America, solid order book and healthy supply of seeds and crop protection products represents the driving factors.

Chemical titanE.I. DuPont de Nemours & Co. (NYSE:DD-Free Report) is witnessing significant momentum in its agriculture business, driven by higher volume and market share gains in seed genetics and crop protection. Its Agriculture segment delivered healthy sales in the June quarter boosted by higher seed pricing. The company expects continued strong gain in agriculture in the second half driven by new products and strength in Latin America. DuPont should also benefit from synergies of Danisco acquisition and its aggressive restructuring actions.

U.S. chemical giant The Dow Chemical Company (NYSE:DOW-Free Report) saw its profit skyrocket in the June quarter on strength in its agriculture business, buoyed by higher demand for crop protection products. While Dow still faces challenges in Western Europe, it is benefiting from strong fundamentals in agriculture and food markets.

The company is also leveraging its North American feedstock advantage and its investments in the U.S. and Middle East are focused on boosting this advantage. A string of innovative products in its pipeline adds to its strength.

We have a bullish view on Eastman Chemical Company (NYSE:EMN-Free Report), which delivered better-than-expected results in the most recent quarter and is well placed to benefit from its Solutia acquisition. The company's diversified chemical portfolio and integrated and diverse downstream businesses represent the pillars of strength. It also benefits from business restructuring, cost-cutting measures and increased capacity additions.

We also have a favorable view on Air Products and Chemicals Inc. (NYSE:APD-Free Report). Strength across merchant and tonnage gases businesses coupled with acquisitions helped it to rake in healthy sales gain in the June quarter. Air Products benefits from a diverse customer base, pricing power and cost-reduction measures. New business deals and strategic investments are expected to support results this year. We are also encouraged by the incremental opportunities in liquefied natural gas (LNG) market.

In the specialty chemical space, PPG Industries Inc. (NYSE:PPG-Free Report) represents an attractive play. The company saw a healthy rise in profit in the June quarter on strong results from its coatings business and cost reduction initiatives. PPG Industries has a diversified base of products and markets, and looks to grow its businesses strategically along with controlling costs.

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