Chemicals

We foresee better relative prospects for the balance of 2024. With the exception of certain specialty chemical niches, inventory de-stocking has largely run its course. This point is critical because de-stocking exerted far greater influence on sector volume trends than did underlying demand fluctuations. Consequently, equilibrated supply chains should pave the way for a rebound in y–y volume growth, even if economic growth remains sluggish as we expect it will be, most notably in China and Europe.

‍

Meanwhile, the recent Fed pivot could do wonders for the sector’s largest end-use market, building and construction. Of course, lower interest rates willl end support to trading multiples too, although capital markets have already priced in much of this rate relief, beginning with a powerful stock surge in the final two months of 2023.

With stock prices having continued to climb in 2024E, valuation metrics appear uninspiring, yet that is often the case at this point of the cycle with earnings estimates for commodity chemical companies having been slashed, cut, pared, and then trimmed some more. While we don’t expect US and China stimulus actions to cure all ills –operating rates are low and pricing prospects remain mixed for example – we do think it makes sense to put a few more chips in the middle, especially as itrelates to chemical stocks that are inexpensive on the basis of normalized earnings.

‍

Our top pick is currently crop protection chemicals producer FMC Corporation.

‍