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US chemical companies set to have another poor quarter due to China's supply glut and tariffs

The U.S. Chemical industry is likely to report another quarter of low earnings, as tariffs and Chinese overcapacity continue to squeeze margins. LyondellBasell, Dow, Sherwin-Williams, Celanese, and Eastman Chemical will likely post lower profits following a difficult second quarter, marked by weak automotive and manufacturing demand.

Analysts said that the commodity chemical producers face a cyclical downturn which has now lasted for 38 months.

We'll see continued pressure on their earnings in Q3. Seth Goldstein, Morningstar analyst, said: "I don't believe there will be any relief or difference based on the guidance given during Q2."

China's rapid ramp-up of ethylene production – a key component for plastics and packaging, as well as construction – has exacerbated a global glut, pushing down prices and margins in the U.S., Europe and other markets.

High energy costs, an aging infrastructure, and strict environmental regulations have put pressure on the petrochemicals industry in Europe. This sector relies on imported feedstocks. As a result, several plants were closed after years of losses.

RBC Capital Markets' Arun Viswanathan says that the demand for commodity chemicals has been "somewhat tepid". Dow and Eastman are projecting earnings lower than previous guidance midpoints.

The near-term volume pressure is due to a combination of sluggish building and construction activities, coupled with the ongoing uncertainty surrounding tariffs. However, some improvements could be seen in the near future, he said.

The U.S. tariffs on European goods of at least 15 percent have dampened the demand for key consumers, including automakers and machinery manufacturers as well as consumer goods producers.

The recent Carlyle deal to purchase BASF's Coatings Business highlights the continued portfolio reshuffling in spite of industry headwinds.

As trade and geopolitical tensions continue, investors will be watching earnings calls to get signals on cost-control, recovery prospects, and demand trends.

Dow will report on October 23, LyondellBasell October 31, and Eastman Chemical November 3.

(source: Reuters)