INSIGHT: US chemical stock plunge reflects fears of economic slowdown/recession

Source: ICIS News

2019/03/22

NEW YORK (ICIS)--The heavy losses in US chemical equity prices on Friday, along with the fact that stocks have badly lagged the recovery in the broader market year to date, point to fears about a worse-than-expected global economic slowdown.

On Friday, US chemical stocks fell on the order of 4-6%, far greater than the broader market as measured by the S&P 500 which registered a 1.9% decline. European bourses also fell (Germany’s DAX -1.6%, and UK’s FTSE and France’s CAC both -2.0%).

US CHEMICAL STOCK PRICES PLUNGE
Close on 22 Mar 2019
Company Price % Change
DowDuPont $53.93 -3.6%
LyondellBasell $85.07 -3.7%
Westlake Chemical $66.10 -5.2%
Eastman Chemical $75.12 -4.9%
Huntsman $21.69 -5.2%
Chemours $38.29 -5.6%
Celanese $98.16 -4.4%
Olin $22.55 -4.0%
Trinseo $44.06 -6.5%
AdvanSix $28.41 -5.8%
Ashland $76.63 -3.6%
PolyOne $28.61 -6.1%
Source: Yahoo Finance

The inversion of the 3-month and 10-year US Treasury yields on Friday for the first time since 2007 spooked investors, as this can signal a severe slowdown or recession.

Essentially, the bond market “believes” the US economy will slow markedly in the coming years, prompting the US Federal Reserve to lower interest rates – thus the lower long-term (10-year) yield versus short-term (3-month) yield.

However, the more widely watched 2-year and 10-year Treasury yield spread (recession indicator) has not inverted yet, even as it has narrowed considerably in the last several months.

The US Fed on Wednesday signalled no more interest rate hikes in 2019 as it took down its estimate for 2019 GDP growth to 2.1%, versus 2.3% in December.

The central bank also announced it will end the shrinking of its balance sheet in September, with the tapering beginning in May. The end of this quantitative tightening will inject more liquidity into the financial system.

While this is a positive stimulus measure (or at least the end of tightening), such a move highlights how concerned the Fed is about the impending slowdown of the US economy.

US Fed chairman Jerome Powell pointed to substantial weakening in European and Chinese economies creating a headwind for the US.

And indeed weakening conditions in Europe and China have been cited by US chemical companies in projected Q1 earnings shortfalls and layoff announcements.

“A lot of companies during their Q4 earnings calls were hoping for a recovery in demand post Chinese New Year. As seen in Huntsman and Eastman’s guidance updates, things seem to be picking up at a slower pace which suggests consensus numbers need to come down more,” said Hassan Ahmed, chemicals analyst at Alembic Global Advsiors.

“Companies more auto/housing and Europe exposed are getting hit harder,” he added.

US-based Huntsman expects Q1 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to be 10% lower versus Q4 2018 on weaker construction and auto markets in the US, as well as “softer demand patterns” in most large European economies.

In Europe, polyurethanes are seeing weaker demand in most large European economies, and Huntsman confirmed automotive is one of the sectors where activity had slowed down.

Huntsman’s textile effects segment “continues to feel the effects of lingering” challenges in China due to weaker volumes, although Q1 earnings would be in line with Q4.

Huntsman’s adjusted Q4 EBITDA came in at $275m, on sales of $2.24bn. This implies Q1 EBITDA of about $248m, which would also be down 39% from the year-ago period. The company reiterated its guidance of a 5-7% decline in adjusted EBITDA for all of 2019.

And US-based Eastman Chemical on 15 March announced a “modest and targeted reduction” in its workforce” and a delay in salary increases for most employees on a weakening outlook, specifically in China and Europe.

“We are operating in a difficult business environment and had hoped and expected to see stronger signs of economic recovery by now,” the company said in a statement.

“Unfortunately, the ongoing US-China trade dispute and the associated economic slowdown in China and Europe have created tremendous uncertainty, which has resulted in reduced demand for our products,” it added.

Both Huntsman and Eastman have a good amount of exposure to the automotive sector, one of the key chemical end markets showing weakness.

North American chemical companies with significant exposure to new vehicle demand will experience greater earnings pressure in 2019 amid soft vehicle sales and an uncertain economic outlook, according to credit ratings agency Moody’s Investors Service.

Slowing sales in China, a sluggish European market and negative US sales growth will contribute to soft global vehicle sales this year, it added.

Moody’s points out that 21 of roughly 100 North American chemical companies it covers generate at least 10% of their sales from products used in new cars.

A slowdown in auto sales will also have a range of effects on the 17 North American chemical firms that generate 10%-20% of their sales from chemical intermediates, elastomers, plastics and coatings used in new vehicles, it added.

The soft patch in the European economy and automotive market will likely extend and deepen, according to Laurence Alexander, chemicals analyst at Jefferies.

“End-market volatility and broad-based weakness in Europe will likely weigh on Trinseo’s shares in the near term despite a combination of improving mix, cost discipline, and strong free cash flow generation,” said Alexander in a research note.

Trinseo is heavily exposed to Europe, with 60% of its sales coming from the region. On the product side, it faces headwinds from high styrene inventories in China and coming overcapacity in polycarbonate, he noted.

Additional contribution from Jonathan Lopez, Lane Kelley and Nurluqman Suratman

By Joseph Chang