One of the most attractive areas right now for turnaround-focused investors is chemical stocks, with the share prices for many major producers in this group hovering at or near multi-year lows.
The reasons for this collective underperformance vary, and while not all chemical companies are in a classic turnaround situation, many of them are under serious margin pressures and are implementing strategic plans aimed at improving their company’s fortunes and reversing the stock price declines.
In spite of seemingly rampant inflation pressures across the broad economy, chemical producers aren’t necessarily seeing the same upward pressures for the feedstocks they use. At face value, subdued natural gas prices (a common feedstock for many chemical makers, particularly in the U.S.), along with lower prices across several major chemicals in the last couple of years, have afforded a degree of insulation from broader inflationary pressures.
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Specifically, natural gas prices are down by a whopping 60% from the market’s peak three years ago, providing some relief for makers of chemicals like ethylene and propylene—both of which are used heavily for making plastics.
The lower feedstock costs would normally be bullish for major plastics producers like LyondellBasell (LYB). However, other, more aggravating factors have created some serious headwinds for the company and many of its industry peers.
Among those negative factors are a slowing U.S. economy (in part due to inflation), with lower demand among end-user markets like construction, consumer durables and automotive, leading to overall chemical volumes, plus lower sales and earnings.
Additional factors weighing against chemical stocks include U.S. tariffs on chemical imports from China, which are expected to raise raw material costs by an average of 12% for U.S. firms, in turn likely to adversely impact margins.
Consequently, output is predicted to be lower in 2025 (down 1.4% to be exact) for producers of plastic resins as manufacturing and export demand declines. (By contrast, consumer and agriculture chemicals are projected to be the strongest performers within the overall chemical space, with volume increases likely to offset weaknesses in other segments.)
Concerning LyondellBasell, in a recent earnings call, CEO Peter Vanacker acknowledged the downcycle in the plastics industry in no uncertain terms:
“This is the longest downturn in my 35 years in the industry. And with our strategic and also intentional portfolio management, as well as our proactive cash management, we remain confident that we will navigate this cycle and emerge even stronger as a more sustainable and a more profitable leader for our industry.”
Incidentally, industry analysts ascribe the downturn not so much to lower demand, but to oversupply created by new capacity coming online from major producers like China, which has pushed prices lower. Another result of the downcycle has been steep reductions in margins for olefins and polyolefins, historically LyondellBasell’s most profitable segments, with prices for polypropylene (the finished plastic) in decline.
Source: Trading Economics
Looking ahead, most analysts don’t see a strong rebound in margins in 2026 for petrochemicals (which include ethylene and propylene), although there is a growing belief that an upward turn in the cycle could begin next year (see chart below).
Source: BusinessAnalytiq
For LyondellBasell and many of its peers, the planned expansion projects that have partly contributed to the oversupply problem are now being curtailed, which in turn should help attenuate the downward pricing pressures in the coming quarters.
Moreover, as the global economy continues to expand, the demand for petrochemicals and related end-markets should also improve, providing an attractive long-term opportunity for the overall industry.
3 Chemical Stocks on My Watchlist
Among the stocks on my watchlist right now (aside from LyondellBasell) are: Dow (DOW), Huntsman (HUN) and Celanese (CE)—all of which are major plastics producers that should benefit from an upturn in the petrochemical market.
To learn more about the turnaround stocks I’m watching now, subscribe to Cabot Turnaround Letter today.
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