The 2016 sector outlook for North American chemicals is stable,
according to Fitch Ratings. Producers are benefiting from solid demand
in domestic manufacturing and the recovery in U.S. construction and
consumption despite the sector being comprised of many heterogeneous
products, each with its own competitive dynamics and end-market exposure.
Fitch expects producers to manage trade headwinds from weaker emerging
markets and the stronger dollar, as well as commodity price deflation.
Fitch believes rating changes will be related to event risk from
recapitalization events, divestitures or acquisitions rather than a
slowing global economy.
Trade Headwinds
More than 20% of revenues for some North American issuers come from
EMEA, where demand growth is expected to be positive but weak. China is
struggling to shift its economy toward consumption and away from
construction and exports, resulting in sharply lower growth. Brazil and
Russia are in recession and their currencies have sharply depreciated.
The stronger U.S. dollar challenges exports and earnings upon
translation but is less of a headwind for producers with local currency
production, hedges or pricing power.
Commodities Price Fall Muted
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. After
three bumper crops in a row, crop prices are weak, pressuring farm
economics and weighing on fertilizer, crop protection and seed prices.
Low costs and/or strong market positions have resulted in resilient
margins.
Feedstock Advantage
Low North American natural gas and natural gas liquids (NGLs) prices
remain cost advantages as a result of strong supply, even after the drop
in oil prices. The drop in oil has resulted in lower olefin prices, but
integrated producers have benefited from better pricing dynamics as a
result of robust demand for downstream polymers.
Outlook Sensitivities
Prolonged Excess Supply
Productive capacity has been increasing with China's drive for
self-sufficiency in construction and agricultural chemicals, expansion
of low-cost olefins and ammonia production in the U.S. and potash in
Eastern Europe and expectation for strong growth in the emerging
markets. The downturn in emerging markets has resulted in excess supply
for some chemicals, hurting pricing, earnings and cash flow.
Capital Allocation Favors Shareholders
Issuers tend to generate healthy operating cash flows, which had been
accumulating following the global financial crisis to support liquidity
and acquisition strategies. More recently, activist shareholders are
looking for a return of capital, and in some cases, recapitalization or
breakup. Chemical producers seek to keep strong liquidity and flexible
capital structures given their value to venders, offtakers, and parties
approving permitting and reclamation.
Additional information is available at 'www.fitchratings.com'.
2016 Outlook: North American Chemicals (Managing the Macro)
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