Ida, Supply Constraints Dent US Chemicals as August Output Dips
The August reading showed lower production on a monthly comparison basis across all regions barring Northeast, reflecting the impacts of Hurricane Ida...
U.S. chemical production edged down in August following three consecutive months of gains held back by 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") slipped 0.3% in August on a monthly comparison basis, following a 1.1% growth a month ago and a 3.4% rise in June. 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 rose in August with output increasing 0.5% on a three-month moving average basis. Gains in output were witnessed in aerospace, construction supplies, motor vehicles and parts, machinery, computers, semiconductors, iron and steel products, foundries, plastic products, printing, furniture, textile mill products 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 Decline in Regional Production
The August 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 — witnessed a sharp decline in output in the reported month. Hurricane Ida that slammed 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 dropped 0.8% in August, per the ACC. Output in Midwest fell 0.3% while Southeast and West Coast saw 0.1% decline. Production also slipped 0.2% in Ohio Valley and Mid-Atlantic. Northeast recorded a 0.1% gain in the reported month.
Chemical production was mixed by segments in August. Improved production was witnessed in synthetic rubber, manufactured fibers, other specialty chemicals, fertilizers, coatings and consumer products, offset by organic chemicals, plastic resins, miscellaneous inorganic chemicals, crop protection chemicals and adhesives.
Strong Demand Drives U.S. Chemicals Amid Supply-Chain Worries
The U.S. chemical industry has pulled off a comeback from coronavirus-induced challenges, aided by a return of economic activities. The industry faced the heat from a significant downturn in demand during the first half of 2020 as lockdowns and travel restrictions amid the pandemic brought economic activities to a near-standstill.
However, demand for chemicals started to recover from the third quarter last year 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 U.S. manufacturing sector remains in the expansion territory despite the ongoing supply-chain problems and the spread of the highly contagious Delta variant, supported by strong demand for goods and an upturn in the overall economy. The sector has staged a strong rebound from the pandemic blues with activities showing a V-shaped recovery.
A recovery in construction and automotive markets is also driving demand for chemicals. The U.S. automotive industry has witnessed a speedy recovery on the back of a strong rebound in customer demand for new vehicles. Despite the semiconductor crunch, chemical makers are seeing healthy demand from the automotive market.
The construction sector has also recovered on the restart of projects that were stalled earlier partly due to supply chain disruptions. Residential construction is picking up, supported by lower interest rates. Demand for chemicals is likely to remain strong in these major markets through the balance of 2021.
However, U.S. chemical producers are reeling under the effects of raw material cost inflation as well as higher supply chain and logistics costs. Supply chain disruptions due to coronavirus and weather-related events have led to a spike in input 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 chain disruptions.
The supply constraints are compounded by the disruptions associated with Hurricane Ida. Force majeures and plant shutdowns related to Ida are expected to further squeeze the supply of major raw materials including ethylene and propylene and push up their prices, impacts of which are likely to be felt on chemical companies’ third-quarter results.
Chemical Stocks Worth Considering
A few stocks currently worth considering in the chemical space are Avient Corporation AVNT, AdvanSix Inc. ASIX, Olin Corporation OLN, The Chemours Company CC and Ingevity Corporation NGVT. While Avient and AdvanSix sport a Zacks Rank #1 (Strong Buy), Olin, Chemours and Ingevity carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Avient has expected earnings growth rate of 43.7% for the current year. The Zacks Consensus Estimate for earnings for the current year also has been revised 5.9% upward over the last 60 days.
AdvanSix has expected earnings growth rate of 160.4% for the current year. The consensus estimate for the current year has been revised 24.5% upward over the last 60 days.
Olin has an expected earnings growth rate of 46.2% for the current year. The Zacks Consensus Estimate for current-year earnings has also been revised 23% upward over the last 60 days.
Chemours has expected earnings growth rate of 86.4% for the current year. The consensus estimate for the current year has also been revised 11.5% upward over the last 60 days.
Ingevity has expected earnings growth rate of 12.7% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 3.4% upward over the last 60 days.
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