After bearing the brunt of the global economic crisis, the highly cyclical $5 trillion global chemical industry is on the slow road to recovery amid a still-fragile macro environment. Although, the chemical industry fared reasonably well in the second quarter of 2015 helped by strength across automotive and residential construction markets, it remains challenged by soft agriculture market fundamentals, depressed demand in energy markets, sluggishness in China and a stronger greenback.

Economic cooling in China, which is a major market for chemicals, remains a deterrent over the near term. China’s GDP rose 7% in second-quarter 2015, representing the weakest pace in the last 6 years. The country’s economy is expected to slow even further this year in comparison with the prior year as the official GDP growth target for 2015 has been pegged at 7%.

The preliminary Caixin China manufacturing purchasing managers' index (PMI) for September fell to a six-and-a-half-year low of 47.0. This compares with a final reading of 47.3 in August. A reading of less than 50 indicates contraction in manufacturing activity. This recent spate of disappointing data has raised concerns around the health of China's economy, which in turn has cast a dark shadow over the chemical industry.

Outlook for Europe also remains cloudy. The eurozone economy is stuttering, with meager growth of 0.3% in the second quarter of 2015. Chemical makers in the European Union remain affected by lower prices and sluggish demand. Chemical prices, which fell 1.8% in the European Union last year, remain under pressure.

Lower oil prices are hurting demand for chemicals in the energy space, an important end-market. Depressed crude oil prices will continue to keep chemical prices under check as they essentially move in tandem with oil prices.

These headwinds apart, the chemical industry will improve on the back of a gradually improving U.S economy. According to the American Chemistry Council (ACC), an industry trade group, U.S. chemical production will expand both this year and next, and the American chemical industry will eventually transcend the nation’s overall economic growth and emerge as a long-term growth engine as improvements in key end-use industries and emerging markets take hold.

The shale revolution has incentivized a number of chemical companies to invest billions of dollars to ramp up capacity in the country. The automotive sector is witnessing significant momentum and is reaping the benefits of low gasoline prices. Chemical makers are expected to gain from higher demand from this important end-market.

Recovery across housing and commercial construction, another major chemical end-market, has been one more supporting factor for the chemical industry’s recovery. The US Architecture Billings Index (ABI), an economic indicator that provides approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, remained over 50 for most of the recent months. Any score above 50 indicates an increase in billings.

Moreover, the American Institute of Architects (AIA) expects non-residential construction spending to go up nearly 8.9% in 2015 and 8.2% in 2016. This bodes well for chemical demand in the construction markets.

Within the Zacks Industry classification, the chemical industry falls under the broader Basic Materials sector (one of 16 Zacks sectors). We rank all of the more than 257 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page.

The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (Zacks Industry Rank between #87 and #173) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #174 and higher) is negative.

We have three chemicals related industries: Chemical Diversified, Chemical Plastics, Chemical Specialty all of which are languishing in the bottom tier with respective Zacks Rank of #207, #219 and #237. Looking at the exact location of these industries, one could say that the general outlook for the chemical industry is ‘Negative’ at the moment.

While the negative outlook on the chemical sector might seem to suggest that this is an area to steer clear from at the moment, we have picked few stocks in the space which are presently enjoying a Zacks Rank #1 (Strong Buy) or #2 (Buy). Going by the Zacks model, companies sporting a Zacks Rank #1 or Rank #2 have strong chances of outperforming the broader market in the near term. What’s supporting the bull cause of these particular stocks, let’s find out.

Koppers Holdings Inc. (KOP - Snapshot Report)

Headquartered in Pittsburgh, PA, Koppers Holdings Inc. provides carbon compounds, and chemicals and treated wood products and services in the United States and internationally. The company serves the aluminum, railroad, specialty chemical, utility, rubber, concrete, steel, residential lumber, and agricultural industries. It has a market capitalization of $429.4 million.

Positive trends in home repair and remodeling bodes well for the company as it tends to drive demand for its products. The company remains focused on generating cash to de-lever its balance sheet, de-emphasize its Carbon Materials and Chemicals (CMC) growth strategy in the low-margin emerging markets and restructure the overall CMC operating footprint.

This Zacks Rank #1 stock has an expected earnings growth of 10%. The company delivered positive earnings surprises in the past two quarters.

Trinseo SA (TSE - Snapshot Report)

Headquartered in Berwyn, PA, Trinseo S.A., manufactures and markets various emulsion polymers and plastics. Its products are used in tires and other products for automotive applications, carpet and artificial turf backing, coated paper and packaging board, food service packaging, appliances, medical devices, consumer electronics and construction applications, and others. It has a market capitalization of $2.5 billion.

Trinseo will benefit from its incessant efforts to control costs and recent price increases. The company is particularly focused on its Performance Materials segment as it expects to sustain the solid performance and generate good returns in 2016. The drivers of this growth include continued positive mix shift and higher volumes in rubber, new volume from China expansion as well as price increases and cost initiatives in latex, as well as modest volume growth in Performance Plastics.

This Zacks Rank #1 stock has an expected earnings growth of 6.25%. The company delivered positive earnings surprises in the past two quarters.

Air Products & Chemicals Inc. (APD - Analyst Report)

Pennsylvania-based Air Products and Chemicals makes industrial gases as well as a variety of polymer and performance chemicals. It also supplies processing equipment. The company serves technology, energy, industrial and health care customers globally. It has a market capitalization of $28.05 billion.

Air Products benefits from a diverse customer base, sustained pricing power and cost-reduction measures. It also stands to profit from incremental opportunities in the liquefied natural gas market. Moreover, new business deals and strategic investments are expected to support results in fiscal 2015.

This Zacks Rank #2 stock has an expected earnings growth of 13.3%. The company delivered positive earnings surprises in the last four quarters, with an average of 2.90%.

Eastman Chemical Co. (EMN - Analyst Report)

Headquartered in Kingsport, TN, Eastman Chemical Company, a specialty chemical company, manufactures and sells materials, chemicals and fibers in the U.S. and internationally. It has a market capitalization of $10.08 billion.

Eastman Chemical will benefit from its business restructuring initiatives that have reduced cyclicality by 40%. As part of the restructuring, the company sold unprofitable units and closed businesses that could not be sold. Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses, remains its strength. It will also benefit from strategic acquisitions, cost-cutting measures and capacity additions.

This Zacks Rank #2 stock has an expected earnings growth of 9.07%. The company delivered earnings surprises in the last four quarters, with an average of 9.36%.

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