Chemicals

We continue to prefer specialty vs. commodity chemical exposure as weenter the third year of the current cyclical downturn in Chemicals. Diversified and commodity chemical names continue to suffer through a prolonged period of earnings pressure dating back to August 2022. Looking ahead, we judge that tension in estimates remains to the downside in 1H25. We expect a global excess supply condition to persist, amidst demand weakness in Europe and loose market conditions in China. Against this backdrop, it would be an understatement to say that 2024 was a tough year for chemical stocks. Of our 20 names under coverage, zero kept pace with the S&P 500 index. Buy-rated Corteva (CTVA) – one our two top picks this time last year along with Buy-rated APD – traded within stalking distance of the broader market as did Hold-rated Ecolab (ECL), but decliners outnumbered advancers in 2024, despite a rally in the S&P 500. In fact, the median stock in our coverage surrendered -16.5% with the averagechemical stock down -10.7% for a dismal performance of -35.7% relative to the broader market. Our stock outlook for 2025 is less bearish. While we do not project another cyclical earnings peak until 2027-28 at the earliest, we do expect operating rates to stabilize and recover directionally, aided by ongoing disinvestment that includes rationalization of existing supply in Europe. Demand growth could pick up too, but that is not in our forecast for 1Q25.Taking into account a powerful surge in the USD, we expect most companies to “err on the side of caution” when formulating earnings guidance for 2025. Stockwise, we note that value names are now “on sale”, having been freshly pummeled in 4Q24, so we would not be surprised to see a bounce among commodity-linked names in coming weeks/months. Overall though, we advocate equal weight exposure to the sector, with an ongoing preference for specialty vs. commodity exposure. Our top picks are three specialty chemical producers that have corrected appreciably:  FMC, IFF and RPM.