OUTLOOK '18: US stocks may extend gains on global growth

02 January 2018 20:00 Source:ICIS News

HOUSTON (ICIS)--The same factors that boosted US chemical stock prices in 2017 will likely persist in 2018, opening the possibility for further gains.

The year 2017 was marked by a growing global economy with relatively little new capacity, outside of polyethylene (PE) plants and crackers in North America.

These trends will continue in 2018.

The International Monetary Fund (IMF) raised its estimates for global growth to 3.6% in 2017 and 3.7% in 2018, compared with the estimates of 3.4% and 3.6% it made in January 2017.

Demand for chemicals is correlated with GDP, so a growing economy will increase chemical consumption.

Rising demand would not mean much if producers were adding new capacity faster than consumers could buy chemicals.

However, in some markets – notably titanium dioxide (TiO2) – companies are refraining from building new plants. For pigments, the last significant new project was the TiO2 plant that Chemours completed in Altamira, Mexico.

For some products, companies are removing capacity. In Europe, chlor-alkali producers are shutting down mercury-cell plants to comply with environmental regulations.

China is pursuing a general environmental crackdown on especially dirty plants to improve the country's air quality. This has allowed foreign producers to gain market share from Chinese competitors.

In other cases, some plants are difficult to start up. Methyl di-p-phenylene isocyanate (MDI) plants are especially complex and the market has a high barrier to entry.

Kevin McCarthy, chemical analyst for Vertical Research Partners, highlighted these three products in a recent interview with ICIS.

Vertical Research established a preference for companies with links to commodity chemicals, and McCarthy said it served the firm fairly well. "We are bullish on chlor-alkalis, TiO2 pigment and MDI in particular."

In fact, TiO2 producers posted the biggest gains among the companies followed by ICIS.

Looking at 2017 equity performances through mid-December, Chemours was the top performer, with its stock price more than doubling from the start of the year. Kronos Worldwide was the close second.

Calumet Specialty Products, a refiner, was third in the ICIS list. The company replaced its CEO with Timothy Go at the start of the year, and he embarked on a turnaround plan.

Following Calumet is another TiO2 producer, Tronox.

Wrapping up the top 10 ICIS performers are Chilean lithium and fertilizer producer SQM, US nylon producer AdvanSix, vinyls and polyolefins producer Westlake Chemical, pine-chemicals producer Kraton and Huntsman.

Kraton entered the pine-chemicals industry with its $1.37bn purchase of Arizona Chemical in 2015. The company also makes styrenic block copolymers.

Huntsman recently completed the spin-off of its pigments business, Venator Materials, leaving it with a portfolio of polyurethanes, surfactants and epoxy resins among others.

Because Venator was only recently spun off, its stock still does not have a long track record.

Other standouts just below the top 10 are lithium and catalyst producer Albemarle, chlor-alkali producer Olin and pine-chemicals producer Ingevity.

Nearly every company followed by ICIS posted gains. Two indices illustrate the strength of the sector.

The S&P 500 Chemicals Industry Index closed on 8 December at 623.07 up 22% from 510.90 on 3 January 2017. The Dow Jones US Chemicals Index closed at 663.26, up 21% from 547.51.

Still, a few companies did post losses for 2017 through mid-December. The worst performer was fertilizer producer Mosaic, which fell 17%. Platform Specialty Products, which makes agrochemicals and electronic chemicals, also declined. Bunge, an oilseed and sugar processor, was also down.

The declines reflect the challenges in the agriculture sector, which has struggled with low crop prices. Other fertilizer producers posted gains in 2017, but they still lagged well behind the other companies followed by ICIS.

Other decliners include midstream companies. Alerian MLP is an exchange-traded fund made up of several midstream companies. It was the second-worst performer, falling 11% in the 2017 period. Midstream company Enterprise Products also fell.

Looking ahead, some of the challenges facing chemical companies will be the influx of new capacity starting up in 2018. Most of these plants will produce ethylene and PE, so companies that sell these products could feel some price pressure from the additional supply.

Other stocks are already trading at relatively prices when compared with their earnings, which could limit potential gains. For specialty chemical firms, price-to-earnings multiples are elevated when compared with commodities, McCarthy said.

Nonetheless, McCarthy expects more of the same in 2018, with commodity-linked chemicals remaining relatively inexpensive when compared with their specialty-chemical peers, he said. Outside of ethylene derivatives, there is a dearth of new capacity in some commodities, such as chlor-alkalis, polyvinyl chloride (PVC), MDI and TiO2, McCarthy said.

The table below shows the performance of the US-traded stocks followed by ICIS.

Name % Total
Return in
2017 Period
Chemours 116.21
Kronos Worldwide 116
Calumet Specialty Products 102.5
Tronox 94.18
SQM 82.76
AdvanSix 81.62
Westlake Chemical 79.64
Kraton 62.82
Huntsman 61.56
Sherwin-Williams 53.4
Albemarle 52.83
PolyOne 39.31
Olin 38.97
Ingevity 37.57
Celanese 37.52
Ecopetrol 36.09
Valero Energy 32.32
Praxair 31.89
Marathon Petroleum 31.54
Andeavor 29.58
CF Industries 28.53
Calgon Carbon 27.65
Braskem 27.42
DowDuPont 26.69
Eastman Chemical 24.6
PPG Industries 24.12
PBF Energy 24.1
Cosan 23.51
Methanex 23.12
Trinseo 21.45
Axalta Coating Systems 19.15
Ashland 18.97
Phillips 66 18.37
Cabot 18.15
Ecolab 16.4
Valvoline 15.31
HB Fuller 12.96
Westlake Chemical Partners 11.97
A Schulman 11.87
Agrium 8.16
PotashCorp 6.8
Ultrapar 6.14
WR Grace 5.12
RPM International 1.76
DCP Midstream 1.2
Occidental Petroleum 0.98
Bunge -0.96
Enterprise Products -1.6
Stepan -3.42
Platform Specialty Products -3.67
Petrobras -4.06
ExxonMobil -5.03
NewMarket -7.18
Alerian MLP ETF -11.25
Mosaic -17.42

Source: Morningstar

(clarified year to date as in the 2017 period)

By Al Greenwood