The chemicals industry is set to boom in the U.S. given the explosion of shale plays and the cheap price of natural gas compared to the rest of the world.
The $3.5 trillion chemicals industry provides a good vantage point from which to observe the state of the global economy, as many of its products stand at the beginning of the supply chain. From consumers to construction, the chemicals industry is set to boom in the U.S. given the explosion of shale plays and the cheap price of natural gas compared to the rest of the world, according to Anton Ticktin, a partner at chemical industry focused M&A advisory investment bank Valence.
“Chemicals go into everything, they are the part of the first step into the creation of so many different products,” explained Ticktin, “the gives you insight into the state of so many industries and sectors” such as the consumer, through plastic bag volumes for example, and construction, through sales of paints and coatings.
The U.S. is perfectly positioned to take advantage of the chemicals market with the emergence of shale gas. Years ago, the U.S. appeared as a market in decline, given it didn’t have comparative advantages in terms of costs or demand, which had shifted to China and Asia. “The U.S. has about 20 to 30 years to benefit from this,” said Ticktin.
And investors can get a cut of the action. Years ago, major chemical companies like Du Pont and Dow Chemical began to move their operations overseas. But today, companies with access to feed stocks that are associated with the production of natural gas, such as propane and ethane, will see a boost in their performance. Major oil and gas companies like Chevron, Exxon Mobil, and Royal Dutch Shell are well positioned to benefit.
Companies in the coatings and paints business will also do well, according to Ticktin. Sherwin-Williams and PPG, for example, are trading near their 52-week highs, while Du Pont and Dow Chemical are on their way back.
Ticktin notes that their performance is related to the comeback in the U.S. construction sector. Spending, and confidence, is rising, he says, and this has fed the boom in all related industries (homebuilders, for example, are also substantially outperforming the general market).
Indeed, if there is a silver lining in the destruction caused by Hurricane Sandy, it will be the strength in construction, Ticktin believes. Water treatment companies, which use a variety of chemicals, also have much to gain.
At the same time, Valence is seeing how the global slowdown spread. While the U.S. is surging, Europe is looking “very flat, which is a reflection of the underlying weakness of their economies.” Also troubling is the marked slowdown in Asia. “Asia is flat-lining,” explained Ticktin, “we are seeing sales, volumes, and margins all coming down.”
The bottom line is that through the lens that is the chemicals industry, Ticktin is seeing the U.S. recovery strengthening vis-à-vis the rest of the world. While GDP is still lagging, the rise in volume and sales seen in the chemical industry should be a good omen for the broader economy.