The chemical industry is in the process of gradual healing after being badly shaken by the Great Recession. Aside from a flurry of challenges, the industry put up a decent performance in the first three-quarters of 2016, benefiting from healthy demand across automotive and housing sectors- two major end-use markets for chemicals.
In a still-difficult global economic backdrop, chemical makers are gradually looking for cost synergy opportunities and greater operational scale through consolidations. These companies are also increasingly switching their focus on high-growth markets in a bid to whittle down their exposure to businesses that are struggling with depressed demand. Strategic actions including cost management and productivity improvement remain the prime focus of these companies.
However, the highly cyclical industry, chemical makers are still feeling the pinch of depressed demand across agriculture and energy markets. A strong dollar is also hurting US chemical exports, reducing their attractiveness in overseas markets. The Eurozone’s tepid recovery and concerns over China’s future growth also remain sources of near-term uncertainties for the chemical industry.
Nagging weakness in China is expected to remain as an overhang on the chemical industry in the short haul. Persistent overcapacity, weak private investment and high levels of corporate debt are hurting the world’s second-largest economy. Moreover, the European chemical industry remains in the midpoint, limited by lower prices, shrinking production and weak R&D investments.
The outlook for the fertilizer and agricultural chemicals space also remains unclear due to continued weakness in crop commodity prices and slow economic conditions in certain developing markets, particularly Brazil.
Despite these challenges, the industry’s recovery is expected to continue heading into 2017, supported by continued strength in the light vehicles market, positive trends in the construction space and significant shale-linked capital investment.
US outlook users hope
The US chemical industry remains on course for growth this year and the next despite several challenges including a strong dollar and a low oil price environment.
According to the American Chemistry Council (ACC), an industry trade group, US chemical production will rise 1.6 percent in 2016 and 3.7 percent in 2017. Barring production of the pharmaceuticals segment, the output is expected to go up 2.7 percent this year and 4.1 percent in 2017.
Particularly, the trade group expects basic chemicals production to expand 3.1 percent in 2016 and 4.9 percent in 2017. Chemical production is also expected to increase across all regions of the country this year.
The ACC predicts the US chemical industry to continue to gather momentum over the next several years on the heels of new capital investments, capacity additions and feedstock cost advantage, and even transcend the nation’s overall economic growth in the long term.
The shale gas abundance and ample supply of natural gas liquids have been a huge driving force behind chemical investment on plants and equipment in the US and have provided domestic petrochemicals producers with a compelling cost advantage over their global counterparts. The ACC expects this competitiveness to drive export demand and new capital investment in the country.
The shale revolution has made the US an attractive investment hotspot. Chemical companies including Dow Chemical, BASF, LyondellBasell Industries, Eastman Chemical, Celanese and Westlake Chemical are investing heavily on shale gas-linked projects to take advantage of abundant natural gas supplies which are expected to boost capacity and export over the next several years. The ACC assumes domestic chemical industry capital spending to increase 10.4 percent in 2016 and 7.8 percent in 2017.
EU still limping along
The outlook for the European chemical industry looks dull given sustained apathy in the region. The Eurozone economy remains stuck in an insipid recovery, manifested by a tepid growth of 0.3 percent in the 3rd-quarter of 2016. Eurozone’s growth prospects, in the short run, are likely to be hindered by Brexit-induced political and economic uncertainties.
Moreover, concerns about the impact of US President-elect Donald Trump's economic policies could hurt sentiment in the region. The European Central Bank has warned that potential protective policies under Trump administration could trigger financial instability and hurt EU’s trade with the US as well as global growth.
Chemical makers in the EU remain affected by lower prices and a challenging regulatory landscape.
According to the European Chemical Industry Council (CEFIC), chemical output in the EU contracted 0.3 percent year over year in the first eight months of 2016 with chemical prices falling 4.8 percent for the period. Lower pricing and output also hurt chemical sales which slipped 4.4 percent during this period.
CEFIC expects a modest growth of roughly 1 percent in chemical output in both 2016 and 2017. Healthy domestic demand coupled with tailwinds from a strong construction end-use market are expected to be offset by sluggish demand for European chemical exports due to a challenging global environment.
Sector level earnings trends
Looking at the overall results of the Basic Materials sector, earnings for the sector participants on the S&P 500 index for third-quarter 2016 rose 4.7 percent from the same period last year. The sector racked up a decent beat ratio (percentage of companies coming out with positive surprises) of 65 percent for earnings in the quarter. However, total revenues for these companies were down 3 percent in the third quarter.
For fourth-quarter 2016, earnings are expected to show a measly 0.3 percent increase. Revenues are forecast to fall 3.2 percent in the quarter. For first-quarter 2017, earnings are expected to accelerate to a 10.2 percent rise while revenues are forecast to dip 2.3 percent.
The road ahead
The chemical industry is still hamstrung by a number of challenges including a weak agriculture market, depressed demand in the energy space, a slowdown in China and a choppy Europe. Nevertheless, sustained healthy momentum in the automotive space and an upswing in the housing market are expected to keep the industry on the road to recovery moving into 2017.
Read More: Global chemical industry stock outlook - Dec 2016
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