U.S. chemical capital spending linked to shale gas have crossed the $200-billion mark, according to the American Chemistry Council (“ACC”), marking a significant milestone for the U.S. chemical industry. Economics of shale gas is driving strong capital investment in new chemical projects.
The Washington, DC-based chemical industry trade group said that 333 chemical projects (both on new plants and capacity expansions) have been already announced by chemical makers since 2010 worth $202.4 billion, 68% of which is foreign direct investment or involves an overseas partner. Moreover, 53% of the announced chemical investment are complete or under construction with the balance currently in the planning stage.
The ACC expects the capital spending announced so far could lead to $292 billion in new chemical and plastics industry output annually and support 786,000 jobs across the U.S. economy by 2025, including 79,000 chemical jobs.
Shale Boom Fueling U.S. Chemical Investment
The shale gas revolution in the United States has been a huge driving force behind chemical investments in plants and equipment in the country. And currently, the U.S. chemical industry is in the middle of a shale-induced investment boom leveraging access to abundant and cheaper feedstocks.
The United States remains an attractive investment destination for chemical projects and domestic chemical makers continue to enjoy the advantage of cheap ethane feedstock extracted from shale gas and natural gas liquids (NGLs).
The shale bounty has provided U.S. producers a compelling cost advantage over their global counterparts, which use oil-based feedstock such as naptha. This is driving investment in chemical production projects in the U.S. Gulf Coast to beef up capacity.
New methods of extraction such as horizontal drilling and hydraulic fracturing (or fracking) are boosting shale production, bringing down prices of ethane (derived from shale gas) in the process.
The shale boom has incentivized a number of companies including DowDuPont Inc. DWDP and LyondellBasell Industries N.V. LYB to plough billions of dollars for setting up facilities (crackers) in the United States to produce key feedstocks like ethylene and propylene in a cost-effective way.
Such investments are expected to boost capacity and export over the next several years. New capacity is expected to provide a boost to chemical production as these investments come on stream.
But Trade War Could Play Spoilsport
Escalating trade tensions between the United States and China pose as headwinds to the chemical industry. Concerns over a fierce trade war between Washington and Beijing have gripped the markets since March 2018.
The United States and China, last month, levied a 25% tariff on $16 billion worth of each other’s products, ramping up the trade tussle between the world’s two biggest economies. The Trump administration, in July, had imposed tariffs on $34 billion in Chinese goods that led to China retaliating with tariffs on American products of equal value.
China’s list of U.S. goods hit with tariffs include chemicals and plastics. Beijing’s retaliatory tariffs would harm a major market for a range of chemicals and plastics produced in the United States.
China is one of the biggest export markets for U.S. chemicals and thus, leaves the American chemical industry heavily exposed to Beijing’s retaliatory trade actions. The tariffs have created an uncertain demand environment for U.S. chemical products in this major market. This is worrisome as export markets are expected to significantly contribute to the growth of the U.S. chemical industry this year and the next.
Moreover, tariffs on U.S. chemical exports by China and the Trump administration’s actions to impose heavy tariffs on steel imports have raised concerns that chemicals companies would reconsider their investments in new projects, which could lead to a slowdown in growth. The hefty steel tariffs are likely to push up the costs of building chemical plants that use a significant amount of steel, thereby eroding the economic benefits of chemical projects. This may harm the U.S. chemical industry’s competitiveness.
U.S. Chemical Set to Ride Growth Wave
The U.S. Chemical Industry has recovered from the damaging effects of hurricanes and is set for solid growth in 2018. The ACC sees U.S. chemical production (excluding pharmaceuticals) to rise 3.4% in 2018.
The growth is expected to be spurred by higher demand across light vehicles and housing markets, capital investments and strengthening export markets. While the automotive sector is expected to remain at high levels, steady recovery in housing is expected to continue in 2018. The trade group also expects U.S. chemicals exports to expand 7.2% in 2018 to $139.2 billion on the back of the basic chemicals sector.
5 Stocks to Scoop Up
Notwithstanding the trade-related worries, the U.S. chemical industry is poised for solid upside this year on continued demand strength across major end-markets, gains in exports and significant capital investment on capacity additions. Amid such a backdrop, it would be prudent to invest in chemical stocks with compelling growth prospects.
We highlight the following five stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now.
Celanese Corporation CE
Irving, TX-based Celanese sports a Zacks Rank #1 also has expected earnings growth of 40.8% for 2018. Earnings estimates for the current year have been revised 12.3% upward over the last 60 days. Moreover, Celanese delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 11.5%. The company also has an expected long-term earnings per share (EPS) growth of 10%. The stock has also gained around 13% over a year.
Ingevity Corporation NGVT
South Carolina-based Ingevity is another attractive choice. It carries a Zacks Rank #1 and has an expected earnings growth of 44.2% for 2018. Earnings estimates for the current year have been revised 7.5% upward over the last 60 days. Ingevity delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 20.6%. The stock has also rallied roughly 43% in a year’s time.
Huntsman Corporation HUN
Our next pick in the space is Texas-based Huntsman, armed with a Zacks Rank #1. The company has expected earnings growth of 41.9% for 2018. Earnings estimates for the current year have been revised 10% upward over the last 60 days. Huntsman delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 22.5%. The company also has an expected long-term EPS growth of 8.5%.
Air Products and Chemicals, Inc. APD
Based in Pennsylvania, Air Products carries a Zacks Rank #2. The company has expected earnings growth of 18.1% for fiscal 2018. Earnings estimates for the current fiscal year have been revised 1.1% upward over the last 60 days. Moreover, Air Products has topped the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 4.9%. It also has an expected long-term EPS growth of 16.2%. The stock has also gained roughly 11% in a year’s time.
Albemarle Corporation ALB
North Carolina-based Albemarle carries a Zacks Rank #2. The company has an expected earnings growth of 17.4% for 2018. Earnings estimates for the current year have been revised 2.7% upward over the last 60 days. Albemarle also has an expected long-term EPS growth of 14.2%. Moreover, the company delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 6.6%.