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 November 24, 2015 - 11:33 AM EST
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Fitch: Lower Energy Prices' Mixed Effect on US Chemical Producers

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. chemical producers.

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 shale.

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.

North American Chemicals Handbook (A Detailed Review of Companies in the Chemicals Sector)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874006

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Source: Business Wire (November 24, 2015 - 11:33 AM EST)

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