Chemicals & Fertilizers

POSITIVES

The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated. In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.

Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.


NEGATIVES

The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the chemical industry. However, oil and gas prices are falling.

Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector.

BUY/SELL RATINGS

Agrium Inc. (NYSE: AGU - News) -- BUY; CF Industries Holdings, Inc. (NYSE: CF - News) -- BUY; Georgia Gulf Corporation (NYSE: GGC - News) -- SELL...zacks.com