Markets & Finance

Commodity Chemicals Lack a Catalyst


By Sam Stovall The Commodity Chemicals group has occasionally appeared on the list of those industries with top Standard & Poor's Relative Strength rankings. Companies in this area produce petrochemicals, plastics, and inorganic chemicals.

Investors have favored the stocks so far in 2002: Through July 5, S&P's Commodity Chemicals subindex rose 4.7%, vs. an 18.9% decline in the S&P 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600). And while shares of many outfits in the chemicals industry's other segments declined in 2001, the commodity group posted a strong performance, rising 8.5% while the 1500 lost 11.8%.

Despite the recent gains, S&P analyst Richard O'Reilly doesn't see any catalysts for the stocks in the near term and has a neutral outlook for the group. His reasons? Fundamentals in key products are still weak, despite initial signs of an economic recovery, he says.

CONTINUING CONSOLIDATION. O'Reilly notes that commodity-chemical producers saw seasonally stronger business conditions in 2002's second quarter, partly because of customer inventory rebuilding and rising selling prices for many petrochemicals, plastics, and inorganic chemicals. Since chemical production is energy-intensive, producers have benefited from energy costs' sharp decrease from early 2001. But prices began to move higher again late in the first quarter of 2002, and this will limit margin improvements.

Assuming plant operations continue at normal levels and recently added ethylene production capacity is absorbed, O'Reilly doesn't see a sharp cyclical recovery in the petrochemicals industry. He thinks the industry's consolidation trend will likely continue as part of an effort to reduce costs.

Reflecting his neutral stance on the group, O'Reilly ranks both Georgia Gulf (GGC) and Lyondell (LYO), the two stocks that make up the Commodity Chemicals index, 3 STARS (hold).

S&P Relative Strength Rankings

These industries carry 12-month relative strength rankings of "5" as of July 12, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.

Industry/Sector

Largest Company (Market Cap.)

S&P STARS* Rank

Air Freight & Logistics/Industrials

FedEx (FDX)

5 STARS

Catalog Retail/Consumer Discretionary

Insight Enterprises (NSIT)

Not Ranked

Consumer Electronics/Consumer Discretionary

Harman International (HAR)

Not Ranked

Commodity Chemicals/Materials

Lyondell (LYO)

3 STARS

Gold/Materials

Barrick Gold (ABX)

4 STARS

Homebuilding/Consumer Discretionary

Lennar (LEN)

5 STARS

Housewares & Specialties/Consumer Discretionary

Fortune Brands (FO)

5 STARS

Managed Health Care/Health Care

UnitedHealth (UNH)

5 STARS

Metal & Glass Containers/Materials

Pactiv (PTV)

5 STARS

Specialty Stores/Consumer Discretionary

Barnes & Noble (BKS)

5 STARS

Trucking/Industrials

Yellow Corp. (YELL)

5 STARS

*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief sector strategist for Standard & Poor's


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