North American chemical cos to gain from modest reflation: Fitch

NEW YORK/CHICAGO, US: A report from the Fitch Ratings states that the North American chemical companies will benefit from the Modest reflation in the energy sector.

According to the study, the Modest reflation in the energy sector should filter through to higher prices for petrochemicals, plastics and other chemicals with energy-related feedstocks, resulting in higher sales, earnings and cash flow.

Market conditions support stable operating profiles for North American (NA) chemical companies in 2017 as most rated NA issuers have solid financial profiles and robust liquidity. Additionally, producers should benefit from a solid recovery in US construction and consumption.

The agency expects the strength of the dollar to be less of a challenge for NA chemical companies in 2017. Though, impediments to free trade would challenge domestic producers since Canada and Mexico are ranked first and second, respectively, in US chemical exports. More than 20 percent of revenues for some NA issuers come from EMEA, where Fitch expects slow demand growth.

The company believes that the event risk will likely tip toward merger and acquisition activity and away from activist shareholder-driven recapitalization or share buyback activity in 2017. Diversified manufacturers have been shedding non-core operations, and speciality chemical companies have been selling or spinning off businesses to improve overall valuation.

Several large mergers have been proposed in the agricultural chemical space, which faces steep regulatory challenges, but should result in more flexibility in dealing with a challenging market and better allocation of capital.

Major intermediate commodity chemicals such as ethylene, propylene and methanol saw large price declines in 2015 with the drop in crude oil, but have recovered in the second half of 2016 due to moderately higher feedstock costs and growing demand. It predicts favourable long-term demand trends for plastics, both domestic and exported, will lead to continued resiliency in pricing for derivatives further down the stream, such as polyethylene and polypropylene.

The company also expects that the TiO2 (titanium dioxide) producers will enjoy further upward price momentum into 2017, although likely at a slower rate than what was seen in 2016.  The utilisation rates to increase to the upper 80 percent range by 2018 from the low 80 percent range in 2015, driven by recovering global demand, global supply reductions and expected pricing discipline among top producers. However, the industry will likely still be highly sensitive to stocking and de-stocking trends.

The supply reductions of the past two years are likely to be offset in the long term as Chemours’ Altamira expansion ramps up to full capacity, emphasizing the importance of stable demand growth and producer discipline in Fitch's estimated price recovery.

In agricultural chemicals, the agency believes agricultural productivity will outpace food demand in the near term, resulting in low grain prices and demands for reduced costs, including rents, fertilisers, crop protection chemicals and seeds.

Pricing pressure for fertilisers is expected to persist in the near term due to excess capacity, which is expected to persist into 2017 before abating somewhat beginning in 2018. It expects annual average demand growth to be about 2 percent per year and for 2017 to mark the trough in the current downturn.

Fitch ratings is an international rating agency in credit ratings and research.

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