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Ida Pulls Down US Chemical Output as Supply Chain Woes Linger

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U.S. chemical production slipped for the third straight month in October, dragged down by the lingering impacts of hurricane-related disruptions and supply chain constraints, according to the latest monthly report from the American Chemistry Council (“ACC”).

The Washington, DC-based chemical industry trade group said that the U.S. Chemical Production Regional Index ("CPRI") fell 0.3% in October on a monthly comparison basis, following a 1.6% drop a month ago and a 0.4% decline in August. The U.S. CPRI, which is measured using a three-month moving average, was created to track chemical production in seven regions nationwide.

Per the ACC, activities for the U.S. manufacturing sector ticked up in October with output edging higher 0.1% on a three-month moving average basis. Gains in output were witnessed in aerospace, construction supplies, food & beverages, fabricated metal products, machinery, computers, semiconductors, refining, iron and steel products, plastic products, rubber products, tires, furniture, paper, printing and apparel.

The manufacturing sector serves as a barometer to gauge the overall health of the U.S. economy and has a major influence on the chemical industry. The sector is a major driver for the chemical industry which touches around 96% of manufactured goods. Manufacturing activity is also a key indicator for chemical production and demand.

Broad-Based Fall in Regional Production

The October reading showed lower production on a monthly comparison basis across all regions barring Northeast. Gulf Coast — the epicenter of the U.S. specialty chemicals and petrochemicals industry — saw the biggest decline in output in the reported month. Hurricane Ida that barreled into Louisiana — one of the largest chemical hubs in the United States — with devastating force on Aug 29 had a significant impact on chemical production.

Production from Gulf Coast fell 0.8% in October, per the ACC. Output declined 0.1% across Southeast, West Coast, Ohio Valley and Mid-Atlantic. Production in Midwest fell 0.3% while Northeast logged a 0.1% gain in the reported month.

Chemical production was mixed by segments in October. Improved production was witnessed in synthetic rubber, manufactured fibers, other specialty chemicals, fertilizers, adhesives, coatings, and consumer products, offset by softness in organic chemicals, plastic resins, basic inorganic chemicals, industrial gases and crop protection chemicals.

U.S. Chemical Rides on Strong Demand Amid Supply Bottlenecks

The U.S. chemical industry has witnessed a strong recovery this year from coronavirus-induced challenges, aided by a return of economic activities. The industry reeled under the effects of demand shocks for much of the first half of last year as industrial activities were put to a halt amid the pandemic.

Demand for chemicals started to pick up from the third quarter of 2020 with a rebound in business activities as major parts of the United States reopened following the loosening of restrictions. The upturn in demand is being driven by an upswing in manufacturing and industrial activities.

The momentum in the U.S. manufacturing sector continues despite the ongoing supply chain and labor problems, supported by strong demand for goods and an upturn in the overall economy. A recovery in construction and automotive markets is also driving demand for chemicals. The U.S. automotive industry has witnessed a rebound on the back of a strong recovery in customer demand for new vehicles. Chemical makers are seeing healthy demand from the automotive market despite the semiconductor shortage, which is hurting automotive production.

The resumption of projects that were stalled earlier partly due to supply chain disruptions has also led to a recovery in the construction sector. Residential construction is picking up, supported by lower interest rates. Demand for chemicals is likely to remain strong in these major markets moving ahead.

However, U.S. chemical producers remain hamstrung by raw material cost inflation as well as elevated supply chain and logistics costs. Supply disruptions due to coronavirus and weather-related events have led to a significant rise in raw material costs.  Higher input costs partly due to the impacts from the devastating winter storm in the U.S. Gulf Coast — the biggest refining and petrochemical production hub in North America — weighed on margins of chemical makers during the first half of 2021. The storm also curbed chemical production in the U.S. Gulf Coast and other parts of the country due to raw material and supply constraints.

The supply crunch was further worsened by Hurricane Ida. The Category 4 hurricane caused significant damage to critical industries in the Gulf Coast area with chemicals being among the hardest hit. Plant shutdowns associated with Ida further squeezed the supply of major raw materials and pushed up their prices, impacting chemical companies’ margins in the third quarter. The impacts of Ida and supply chain bottlenecks are expected to continue in the final quarter of 2021.

Chemical Stocks Worth Considering

A few stocks currently worth considering in the chemical space are Westlake Chemical Corporation WLK, AdvanSix Inc. ASIX, The Chemours Company CC, Univar Solutions Inc. UNVR and Celanese Corporation CE. While Westlake Chemical and AdvanSix sport a Zacks Rank #1 (Strong Buy), Chemours, Univar and Celanese carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Westlake Chemical has an expected earnings growth rate of 580.8% for the current year. The Zacks Consensus Estimate for WLK's current-year earnings has been revised 26.9% upward over the last 60 days.

Westlake Chemical beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 17.8%. WLK shares have gained around 17% over the past year.

AdvanSix has a projected earnings growth rate of 196.9% for the current year. ASIX's consensus estimate for the current year has been revised 6.8% upward over the last 60 days.

AdvanSix beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 46.9%. ASIX has rallied around 143% in a year.

Chemours has an expected earnings growth rate of 105.1% for the current year. The Zacks Consensus Estimate for CC's current-year earnings has been revised 10% upward over the last 60 days.

Chemours beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 34.2%. CC shares have gained around 16% over the past year.

Univar has an expected earnings growth rate of 55.2% for the current year. The consensus estimate for UNVR’s current-year earnings has been revised 9% upward over the past 60 days.

Univar beat the Zacks Consensus Estimate for earnings in the four trailing quarters, with an earnings surprise of 24.1%, on average. UNVR’s shares have rallied roughly 46% over a year.

Celanese has an expected earnings growth rate of 139.5% for the current year. The Zacks Consensus Estimate for CE’s current-year earnings has been revised 8.8% upward over the last 60 days.

Celanese beat the Zacks Consensus Estimate for earnings in the four trailing quarters and pulled off an earnings surprise of 12.7%, on average. Shares of CE have gained around 19% over a year.


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Westlake Chemical Corporation (WLK) : Free Stock Analysis Report
 
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