Macro trends problem sections US chemical market: Moody’s

Macro trends a problem for sections of US chemical market: Moody’s

4:41 AM, 29th January 2016
Macro trends a problem for sections of US chemical market: Moody’s
Moody’s to conduct a comprehensive review of its rated issuers within the US chemical industry. ©The Hindu

NEW YORK, US: Falling commodity prices, strengthening US dollar and slowing global growth, has led Moody’s Investors Service (global credit researcher) to conduct a comprehensive review of its rated issuers within the US chemical industry, the ratings agency said.

Analysts expected meaningful revenue and cash flow deterioration for affected sub-sectors over the next 12-18 months, resulting in a re-ordering of some ratings in the industry, Moody’s said.

“We expect the impact will be much less significant than other sectors impacted by the extended downturn in commodity prices, such as oil & gas, metals, mining and steel,” said Ben Nelson, vice president, senior analyst and co-author of the report, Moody.

Several factors, including continued slow economic growth in developed markets and slowing growth in emerging markets, particularly in China-which accounts for almost a third of global demand for chemicals-are expected to further place downward pressure on the credit profiles of some US chemical companies. Additionally, it is expected that China’s ongoing transition to a consumer economy will reduce the demand for some commodity chemicals, Moody's analysts said.

“For the past few years we have incorporated into our ratings a growing disparity between headline data coming out of China and the performance of rated chemical companies, but recent trends will further exacerbate this situation,” said John Rogers, Moody’s senior vice president, co-author of the report, and lead author of the earlier reports “China’s Slowdown is Credit Negative for Chemical Industry,” published in July 2013 and “Chemicals Demand Growth in China Remains Weak,” published in October 2013.

In previous sector research and rating reports, Moody’s has also cited the drop in oil prices and the strong dollar as contributing to an unusual and growing disparity in profitability that developed in the chemicals industry during 2015. Moody’s macroeconomic forecast for 2016 anticipates that falling economic growth rates in China, continued recession in Brazil and Russia and modest growth in Europe and the US will extend the malaise in these sub-sectors of the chemicals industry.

Falling oil prices will also continue to weigh on the credit strength of certain US chemical companies. Moody’s sharply reduced its price estimates for key oil and gas benchmarks, including expectations for Brent crude to average $33/bbl in 2016 and $38/bbl in 2017. Moody’s said the significant oversupply in the global oil market will impact some rated chemical companies much more so than others depending on the feedstocks they use relative to their competitors.

They also said that liquidity remains relatively solid across the chemical sector in the US, with most companies having at least adequate liquidity to support operations in the near-term following an extended wave of refinancing activity.

The rating agency said it also expects continued mergers and acquisitions activity in the chemicals industry with a shift towards strategic buyers driven by high cash balances and low growth expectations for many rated chemical companies, combined with a reduction in successful bids by financial sponsors due to the recent increase in borrowing costs for highly levered companies and reduced opportunities in sponsor-to-sponsor transactions due to lower valuation multiples.

Overall anticipation is a continuation of downward rating actions in the sector, Moody’s said.

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