Deflation in the energy sector has filtered through to lower prices for
petrochemicals, plastics, and other chemicals with energy-related
feedstocks, resulting in lower sales, earnings, and cash flow, according
to Fitch Ratings. However, low North American natural gas and natural
gas liquids (NGLs) prices should continue to be cost advantages for U.S.
Despite a drop in oil prices, supply is expected to remain robust.
Natural gas and NGL prices are expected to get some demand uplift from
rebased manufacturing capacity, chemical cracker expansions, and coal
power plant retirements, but this will not offset productivity gains in
Despite oil price volatility, North American issuers in Fitch's rated
portfolio continue to exhibit solid financial profiles and robust
liquidity. The U.S. chemicals sector is heterogeneous in composition;
each subsegment has its own competitive dynamics and end-market
exposure. We believe producers should benefit from solid domestic demand
in manufacturing and recovery in U.S. construction and consumption.
Strategic focus in the chemical sector continues around population
trends for new product development and specialization.
Non-diversified producers of intermediate commodity chemicals such as
ethylene, propylene, and methanol have been negatively affected by the
steep decline in oil prices. Pricing for derivatives further down the
stream, such as polyethylene, have been more resilient as end-user
demand has been strong in the top three North American end-markets:
automotive and transportation, building and construction, and packaging.
This has kept margins for integrated producers relatively healthy as
feedstock prices remain near all-time lows.
The drop in hydrocarbon derivatives should also benefit paints and
coatings producers. These derivatives, particularly propylene, are used
to create epoxies, resins, and latex, which are important raw materials
for the industry. Fitch expects the decline in paints and coatings raw
materials prices to be offset by solid growth in the residential and
commercial repaint market and growth in nonresidential construction.
North American nitrogen fertilizer production benefits from low
feedstock costs as short-term demand is influenced by crop composition
and planted acres, which, in turn, are influenced by crop prices and
weather. Long-term prices should benefit from the secular trends of
declining arable land, growing population, and the shift in diet toward
meat. Domestic production has been consolidating while expansions go
forward to take advantage of low natural gas prices.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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