Chemicals Industry Stock Outlook - November 2017

The chemical industry is back on the growth path after being roiled by the global economic crisis. The highly cyclical industry has enjoyed a positive run this year, helped by an upswing in the world economy and continued strength across major end-use markets such as Construction, Automotive and Electronics.

The Zacks Chemicals Diversified industry has outperformed the broader market year to date. The industry returned around 26% over the same time frame, while the S&P 500 index advanced roughly 16.1%.

The September quarter earnings season is on its last leg, with most of the companies in the chemical space having already unveiled their quarterly numbers. We note that a number of companies in the space including prominent names such as Eastman Chemical Company (NYSE:EMN) (EMN), Celanese Corporation (CE) and Air Products and Chemicals (NYSE:APD), Inc. (APD), produced earnings beats in the quarter. The outperformance was supported by solid demand across major end-markets as well as strategic measures including productivity improvement, pricing actions, portfolio restructuring and earnings-accretive acquisitions.

Chemical companies continue to switch their focus on attractive growth markets in an effort to cut their exposure on other businesses that are grappling with weak demand. Moreover, they remain actively focused on mergers and acquisitions to diversify their business, enhance operational scale and perk up growth.

Cost-cutting measures and productivity improvement actions by chemical companies are expected to continue to yield industry-wide margin improvements. A number of chemical makers are also taking appropriate pricing actions in the wake of a sharp rise in raw material costs.

Chemical makers also continue to see strong demand from construction and automotive sectors -- major chemical end-use markets. The automotive sector continues its good run, supported by an improving job market, rising personal income, improved consumer confidence and attractive financing options.

A recovery across housing and commercial construction markets has been another tailwind for the chemical industry. The underlying trends in the housing space remain healthy, backed by steady buyer demand, low mortgage rates, rising rent costs and easy loan availability.

Another positive is a recovery in demand in the energy space -- a key chemical end-market that had been out of favor for a while. The recovery has been driven by the recent rebound in crude oil prices, supported by the Saudi-led OPEC cartel’s compliance with its production cut agreement, declining U.S. oil stockpiles as well as the prospects of extended oil production cuts by OPEC and other major world producers.

Notwithstanding a few headwinds including the lingering impacts of the devastating Hurricane Harvey, the chemical industry’s momentum is expected to continue through the balance of 2017, supported by continued strength across key end-use markets, an improving global economy and significant shale-linked capital investment.