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Zacks Industry Outlook Highlights: FMC, Celanese, Methanex, Potash and DuPont

For Immediate Release

Chicago, IL – April 22, 2016 – Today, Zacks Equity Research discusses the Chemicals, (Part 3), including FMC Corp. (FMC), Celanese Corp. (CE), Methanex Corp. (MEOH), Potash Corp. (POT) and DuPont (DD).

Industry: Chemicals, Part 3

Link: http://www.zacks.com/commentary/78855/what39s-wrong-with-the...

While chemical makers should benefit from strategic growth measures, strength in the automotive industry, recovery in the construction space and investment on capacity expansion, the industry faces certain roadblocks including a still weak agriculture market, lumpiness in Europe and a cooling Chinese economy. There are a few reasons to be cautious in the chemical industry space in the near term, which we have outlined below:

China Worries Linger

Economic slowdown in China -- a major market for chemicals -- remains a key concern over the near term. A downturn in the country's housing market, persistent credit crunch, overcapacity and weak infrastructure investment are hurting the world’s second-largest economy.

China’s GDP growth eased to 6.8% for the fourth quarter of 2015 (from 6.9% in third-quarter 2015), its lowest reading since the financial crisis. The country’s GDP expanded 6.9% in 2015, a marked deceleration from the 7.3% a year ago, and its weakest in a quarter of a century.

The International Monetary Fund (IMF) projects growth in China to moderate to 6.5% in 2016 and 6.2% in 2017. This partly reflects weaker investment growth as the economy continues to rebalance. As such, a sluggish Chinese economy may weigh on demand for chemicals in this significant market.

Europe Continues to Sputter

The European economy is still not out of the woods, as evident from the paltry Eurozone GDP growth of 0.3% in the fourth quarter of 2015, same as witnessed in the third. While Germany recorded steady growth in the quarter, Italy and France showed lack of momentum.

Sluggishness in some of Europe’s major economies continues to deter recovery of the chemical industry in that region. Western Europe continues to pose challenges on chemical stocks due to weak demand, thus remaining a source of near-term uncertainty. Moreover, weak investments and lower pricing remain as overhangs on the European chemical industry.

Soft Demand in Energy Space

Depressed oil prices are hurting investment in the energy sector. This is affecting demand for chemicals in the energy space, an important end-market. While oil prices have rebounded from the 13-year low they hit in Feb 2016, prices remain under pressure given persisting high levels of crude oil production in a heavily oversupplied market. The continuing global supply glut, which has dragged oil prices down for nearly two years, is expected to continue to hurt prices in the short term.

Pricing, Currency Headwinds

Commodity pricing remain a concern for many of the U.S. chemical producers. Their ability to pass these costs on to end consumers is not always easy, given the competitive pressures at play. As a result, margins for a number of producers may be under pressure.

In addition, chemical companies generate a major chunk of their revenues outside the U.S. and therefore are exposed to foreign exchange fluctuations. Strengthening of the U.S. dollar against a basket of currencies (especially the euro) created a significant headwind for these companies during 2015 and is expected to continue to be a drag on profits in the near term.

Still Challenging Fertilizer/Agrichemical Space

Fertilizer and agricultural chemicals makers continue to face challenges from low farm commodity prices, affecting their margins. Weakness in agricultural commodity prices represents a concern for fertilizer companies which may hinder fertilizer use by farmers given the adverse effect of lower crop pricing on growers’ incomes.

Continued downturn in prices of crops (such as corn and soybeans) is weighing on U.S. farm income. According to the U.S. Department of Agriculture (“USDA”), U.S. farm income is expected to slip 3% in 2016 to the lowest level since 2002. Lower farm income unfavorably impacts grower’s purchasing decisions. Weak crop pricing is expected to continue to weigh on demand for nutrients.

Moreover, global capacity expansion continues to exert pressure on urea and other nitrogen fertilizer prices, mainly urea ammonium nitrate (“UAN”). Elevated supply in the global nitrogen market is pressurizing prices, causing farmers to delay buying activities. Moreover, the devaluation of the Chinese currency and reduced coal prices have contributed to a decline in urea prices.

The crop protection market is also expected to remain under pressure in the near term, in part, due to a slowdown in Brazil. Agricultural market conditions remain weak in Brazil. Tighter profit margins and credit are making growers in that country more cautious in their spending. Lower insect pressure and reduced seed volumes are also contributing to a weakening demand for crop protection products.

Bottom Line

As you can see, there are a number of reasons to be watchful about the chemical industry. We hold a bearish view on FMC Corp. (FMC), Celanese Corp. (CE) and Methanex Corp. ( MEOH). It would also be a prudent choice to steer clear of certain companies in the fertilizer/agricultural chemicals space that show weak fundamentals, like Potash Corp. (POT) and DuPont (DD).

Check out our latest Chemical Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector.


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FMC CORP (FMC): Free Stock Analysis Report
 
CELANESE CP-A (CE): Free Stock Analysis Report
 
METHANEX CORP (MEOH): Free Stock Analysis Report
 
POTASH SASK (POT): Free Stock Analysis Report
 
DU PONT (EI) DE (DD): Free Stock Analysis Report
 
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