CHICAGO, Dec. 18, 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), PPG Industries Inc. (NYSE:PPG-Free Report), Methanex Corp. (Nasdaq:MEOH-Free Report) and The Valspar Corporation (NYSE:VAL-Free Report).
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Industry: Chemicals
Link: http://www.zacks.com/commentary/30450/chemical-industry-stock-outlook---dec-2013
Shale Boom Driving U.S. Chemicals
According to the 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.
Boost from Agriculture
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 growers across North and Latin America, solid order book and healthy supply of seeds and crop protection products represents driving factors.
Strategic Measures
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 America.
Moreover, 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.
Recovery in Chinese Demand
China, a major market, is expected to see a recovery in 2014. 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.
China's economy grew at its fastest clip this year in the third quarter. The nation's GDP rose to 7.8% in the quarter from 7.5% in the second riding on government stimulus measures, improving domestic demand and a recovery in exports. Government-backed investments in infrastructure are supporting growth. An improved demand outlook for China bodes well for the chemical industry next year.
Stocks We Like
Stocks in the chemical space that we like include E.I. DuPont de Nemours & Co. (NYSE:DD-Free Report), The Dow Chemical Company (NYSE:DOW-Free Report), PPG Industries Inc. (NYSE:PPG-Free Report) and Methanex Corp. (Nasdaq:MEOH-Free Report). DuPont and Dow, in particular, are witnessing significant momentum in agriculture, driven by higher demand for crop protection products. We also have a bullish view on specialty chemical company The Valspar Corporation (NYSE:VAL-Free Report).
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