Chemicals Hit by Tariffs, But These 4 Stocks Are Worth a Bet

The chemical industry is among those industries that have been bruised by the fierce year-long trade spat between the United States and China. In particular, the U.S. chemical industry is caught in the crosshairs of the trade conflict.

U.S. chemical makers are bearing the brunt of steep tariffs. The Trump administration levied punitive tariffs on $250 billion worth of Chinese products last year while China has imposed retaliatory tariffs on $110 billion in U.S. goods. China’s tariffs on American products include a wide swath of petrochemicals, specialty chemicals and plastics. The list includes chemicals such as polyethylene, polyvinyl chloride (“PVC”) and polycarbonates.

According to the American Chemistry Council ("ACC"), a leading industry trade group, the United States has imposed tariffs on $15.4 billion worth of imports of chemicals and plastics from China, with Beijing retaliating with duties on $11 billion in U.S. exports of chemicals and plastics to China.

Additional Tariffs: Bad News of U.S. Chemicals

Making matters worse, the Trump administration last month reignited the trade tiff with China by announcing new 10% tariffs on an additional $300 billion worth of Chinese exports not already covered by earlier rounds of tariffs.

In response, China recently hit back by slapping 5% to 10% tariff on $75 billion of U.S. imports, some of which took effect on Sep 1. The second phase of tariffs is slated to be effective Dec 15.

The United States retaliated by raising the tariffs on $300 billion of Chinese goods from 10% to 15%, some of which went into effect on Sep 1. The U.S. administration also increased tariff to 30% from the existing 25% on $250 billion in Chinese imports.

The previous rounds of tariffs currently in place are already doing damage to the U.S. chemical industry. China is one of the biggest export markets for U.S. chemicals, leaving the American chemical industry heavily exposed to Beijing’s retaliatory tariffs. The tariffs are hurting U.S. chemical exports.

The new round of tariffs will take further toll on the U.S. chemical industry. The ACC had earlier noted that the total value of U.S. chemicals and plastics imports from China subject to tariffs would reach $26.4 billion should the new round of tariffs come into effect.

Slowing Demand A Worry

The Sino-U.S. trade conflict has led to a slowdown in industrial activities across Asia and Europe, hurting demand for chemicals and plastics. In particular, chemical makers are seeing demand weakness in China associated with the trade war amid a slowing Chinese economy. Notably, the trade friction has led to a slowdown in demand in the automotive market (a major chemical end-use market) in China.

Moreover, a slowing global economy, partly due to the trade tensions, is a concern for the chemical industry. Economic conditions have, in particular, weakened across emerging economies. Moreover, Brexit and other concerns have led to a slowdown in the European economy. Trade war and a slowdown in the automotive industry are hurting the European chemical industry.

Trade Truce Will Bring Respite

In a positive development, China yesterday said that it would exempt some U.S. products from a recent round of additional tariffs. The United States also agreed to delay a planned increase in tariffs on some Chinese imports.

While the countries prepare for another round of negotiations next month, a potential trade truce will provide a much-needed relief for the U.S. chemical industry. China is among the most important trading partners of the American chemical industry. Moreover, export markets are expected to contribute to the growth of the U.S. chemical industry in 2019.

As such, a trade deal could provide a significant boost to American chemical exports which would augur well for the U.S. chemical industry’s growth this year and beyond.

4 Chemical Stocks Worth a Wager

Companies in the chemical space face headwinds from steep tariffs, slowing global economy and some demand weakness amid the trade tiff.

Notwithstanding the challenges, the chemical industry is poised for an upswing this year. In particular, the U.S. chemical industry’s upswing is expected to continue on strength in the U.S. economy, investment on capacity expansion and continued demand strength across major end-markets. U.S. chemical makers should continue to reap the benefits of abundant and affordable shale gas feedstock.

Chemical makers should also benefit from strategic measures, including cost-cutting and productivity improvement, synergies from acquisitions and actions to raise selling prices. A number of companies are taking aggressive price increase actions in the wake of raw material cost inflation. These actions will likely support their margins in 2019.

We highlight the following four stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.

NewMarket Corporation NEU

Based in Virginia, NewMarket sports a Zacks Rank #1. The company has expected earnings growth of 16.2% for the current year. Earnings estimates for the current year have been revised 10.4% upward over the last 60 days. The stock is also up around 11% year to date.

Axalta Coating Systems Ltd. AXTA

Pennsylvania-based Axalta is another solid choice, with a Zacks Rank #1. The company has expected earnings growth of 39.8% for the current year. Earnings estimates for the current year have been revised 3.5% upward over the last 60 days. The company also delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 24.9%. Moreover, it has long-term expected earnings per share growth rate of 12%. The stock is also up around 29% so far this year.

Trecora Resources TREC

Our next pick in the space is Texas-based Trecora sporting a Zacks Rank #1. Earnings estimates for the current year have shot up 60% over the last 60 days. The company also has expected earnings growth of 300% for the current quarter. The stock is also up around 19% year to date.

Israel Chemicals Ltd. ICL

Tel Aviv-based Israel Chemicals carries a Zacks Rank #2. It has an expected earnings growth of 13.5% for 2019. The company also delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 12.8%. The stock also has long-term expected earnings per share growth rate of 9.5%.

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