Chemicals

We foresee better relative prospects in 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 US economic growth were to cool. Meanwhile, an eventual Fed pivot in 2024 could do wonders for the sector’s largest end-use market, building and construction. Such a pivot would of course support trading multiples too, although with a powerful surge in the final two months of 2023, the capital markets seem to have already priced in much (or perhaps “too much”) of this future rate relief. As a result, 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 a turn of the calendar page to cure all ills – operating rates are low and pricing prospects are weak for example – we do think it makes sense to put a few more chips in the middle, especially as it relates to chemical stocks that are inexpensive on the basis of normalized earnings. Our top picks overall are two specialty chemical laggards: APD and CTVA.