North American chemical cos in 2018 - Elusive top line growth

North American chemical cos in 2018 - Elusive top line growth

9:06 AM, 1st January 2018
North American chemical cos in 2018 - Elusive top line growth
North American chemical industry has a stable outlook. (File photo)

NEW YORK, US: Fitch Ratings has a stable outlook on the North American chemical industry and most chemical company issuer ratings, supported by expectations of broad-based, solid economic growth, well-considered financial profiles and robust liquidity. Fitch expects that growth over and above GDP will remain elusive as a result of competitive pressures driving commoditization, high penetration in most markets, and lack of game-changing new products or chemistries. 

Fitch expects chemical demand growth by volume to remain near GDP levels given penetration in most end markets across the consumer, manufacturing and construction sectors. It also expects the agricultural chemical and oilfield service chemical sectors to continue to be challenged by relatively low commodity prices for end-market products in the short term. 

"As industry competition grows, the ability of companies to hold onto premium pricing diminishes and commoditization accelerates," said Monica Bonar, Fitch senior director.

Most rated North American issuers have solid financial profiles and robust liquidity that should be sufficient to withstand cyclical downturns. However, some commodity producers or producers that made leveraged acquisitions are above-targeted leverage. Deleveraging through 2020 in most cases is expected through higher earnings and debt repayment.

M&A activity in the sector is likely to remain steady, as the rating agency believes the same dynamics will continue to drive portfolio actions in the space. Acquisition strategies are focused on delivering growth and cost synergies or transforming toward higher value-added content rather than reflecting conglomerate models. M&A activity is a hallmark of the sector and continues to represent the bulk of event risk.

Recent regulatory changes in China to combat pollution should support better market fundamentals for energy-intensive products such as plastics and urea. It does not expect the depreciating Chinese yuan to be a material drag on earnings from exports into China or translation of earnings from Chinese operations.

TiO2 producers should continue to benefit from pricing gains into 2018/early 2019 on the back of tight supply, robust demand and rising feedstock costs. Fitch believes pigment producers are strongly incentivized to adopt a more disciplined pricing strategy since most are pure play, making it less likely for rising TiO2 prices to result in demand destruction.? The lithium industry will see robust annual demand growth driven by demand from battery applications in electric and plug-in hybrid motor vehicles and grid storage. The global regulatory push toward lower emissions and renewable energy underpins strong demand growth.

Agricultural productivity will be roughly balanced with food demand resulting in modestly higher grain prices but not enough to relieve constraints on cost inflation such as rents, fertilizers, crop-protection chemicals and seeds, in the near term. Pricing pressure for fertilizers is expected to persist in the near term due to excess capacity, which is expected to abate some in 2018/2019. The rating agency expects the overhang for potash to continue longer term.

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