Analyst eyes strong US 2021 chem earnings as price gains should outweigh raw material cost inflation

HOUSTON (ICIS)–Robust demand and tight supply of key commodities have Wall Street analysts bullish on 2021 chemical company earnings, with one boosting 2021 earnings estimates for 10 of the 16 companies it covers in the chemical space.

Hassan Ahmed, an analyst at Alembic Global Advisors, said in a research note on Monday that he expects that product price gains should outweigh raw material cost inflation over the rest of 2021 and that expectations of an average earnings per share increase of 33% year over year “seems tepid”.

“We believe it’s highly possible that some of our covered companies will experience positive earnings revisions throughout 2021,” he said.

US-based paints and coatings producer PPG announced last week that they beat initial guidance as Q1 net sales were 15% higher than the same quarter a year ago.

Ahmed said the ability to pass through rising raw material costs is leading to strong year-over-year margin expansion for some integrated products.

The rapid return of demand following the initial pandemic-related shutdown of the economy was evident as chemical volumes picked up markedly in the second half of 2020.

The trend continued into the first quarter, although volumes took a hit from Winter Storm Uri in February, which knocked many producers in the US Gulf offline.

“Triggered by rebounding demand and outages, most commodity chemical prices in Q1 ’21 were up year-over-year,” Ahmed said, noting that contract polyethylene prices rose 50.8% year on year while contract ethylene prices advanced 68.9% year on year.

Ahmed’s research note said risks that could change their current view include diplomatic relations between Iran and the west, as an improved relationship could lead to the removal of sanctions and accelerated capacity builds in the country, which would slacken supply/demand dynamics relative to his base case assumptions.

Close attention will also be given to China as any marked GDP-driven acceleration of China’s economy will have an impact on global ethylene demand.

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