The U.S. specialty chemical industry started the fourth quarter on a positive note with October seeing a rise in volumes, according to the latest report from the American Chemistry Council (“ACC”).

Positive October Readings

The Washington, DC-based chemical industry trade group said yesterday that U.S. specialty chemicals market volumes rose 0.3% in October on a monthly comparison basis. This follows a 0.4% gain a month ago and a 0.6% increase in August. The data changes are reported on a three-month moving average basis.

Of the 28 specialty chemical segments monitored by the ACC, 17 saw growth in October. During the reported month, large market volume growth (1% and over) was witnessed across foundry chemicals, lubricant additives and textile specialties.

Per the ACC, the overall specialty chemicals volume index went up 6.1% on a year-over-year basis in October. Volumes were driven by year over year growth in 22 markets and functional specialty chemical segments. Oilfield chemicals notched up the strongest growth with volumes climbing 16.6%. The index stood at 114.4% of its average 2012 levels in October, which is equivalent to 3.54 million metric tons.

Trade Tensions Cloud Prospects

Specialty chemical products are used based on their performance and have a specific purpose. They have application in the manufacturing process of a vast range of products including paints and coatings, cosmetics, petroleum products, inks and plastics.

The ACC envisions national chemical production (excluding pharmaceuticals) to rise 3.4% in 2018 and further gain steam with a 3.6% growth in 2019. The growth is expected to be spurred by higher demand across light vehicles and housing markets, an upswing in U.S. manufacturing, favorable shale gas economics, capital investments and strengthening export markets. The trade group expects improving industrial activities to contribute to the growth of the specialty chemicals segment.

However, the prospects of the industry of late are being clouded by escalating trade tensions between the United States and China. The Trump administration imposed tariffs on $50 billion in Chinese goods earlier this year that led to China retaliating with tariffs on American products of equal value. The U.S. administration, in September, also slapped a 10% tariff (slated to rise to 25% starting 2019) on $200 billion worth of Chinese imports, thereby intensifying the trade tensions. In response, China hit back with tariffs on an additional $60 billion in American products.

Beijing’s list of U.S. goods hit with tariffs includes a wide range of chemicals. China is one of the biggest export markets for U.S. chemicals and thus, leaves the U.S. chemical industry heavily exposed to Beijing’s retaliatory trade actions. The tariffs have created an uncertain demand environment for U.S. chemical products in this major market.

Strategic Actions to Reap Margin Benefits

Companies in the specialty chemical space are also hamstrung by feedstock cost pressure. These companies face headwinds from a spike in costs of raw materials as a result of short supply partly due to production outages and plant shutdowns. China’s environmental crackdown has led to the tightening in the supply of certain key raw materials as a result of plant closures. The disruption in the supply chain has pushed up the prices of inputs.

However, the companies in this space are gaining from favorable demand in major end-use markets such as construction, electronics, automotive and agriculture as well as strategic measures including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement and earnings-accretive acquisitions.

Moreover, a number of companies including Ashland Global Holdings Inc. (ASH - Free Report) and W. R. Grace & Co. (GRA - Free Report) are taking aggressive price increase actions in the wake of raw material cost inflation. These actions should help them alleviate any pressure on margin.

Stocks Worth a Bet

Specialty chemical companies are bearing the brunt of trade tariffs and face input cost pressure. However, strategic actions including expansion of scale through acquisitions and continued focus on cost and productivity should keep them afloat over the short haul. The favorable October volume data also augurs well for the specialty chemical industry.

We highlight the following three specialty chemical stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are worth considering for investment in the prevailing operating environment.

Ashland Global Holdings Inc.

Kentucky-based Ashland sports a Zacks Rank #1. It has expected earnings growth of 13.7% for the current fiscal year. Earnings estimates for the current year have been revised 2.8% upward over the last 60 days. The stock also has long-term expected earnings per share (EPS) growth of 10%.

Ingevity Corporation (NGVT - Free Report)

South Carolina-based Ingevity is another attractive choice. It carries a Zacks Rank #2 and has an expected earnings growth of 49.2% for 2018. The company delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 19.8%. Earnings estimates for the current year have been revised 3.5% upward over the last 60 days.

Celanese Corporation (CE - Free Report)

Texas-based Celanese carries a Zacks Rank #2. The company has expected earnings growth of 47.8% for 2018. Moreover, it delivered positive earnings surprise in each of the trailing four quarters, with an average positive surprise of 13.3%. Earnings estimates for the current year have been revised 5% upward over the last 60 days. The stock also has long-term expected EPS growth of 10%.