March 9th, 2010
Fitch expects chemical industry to face higher costs in 2010
Fitch expects chemical industry to face higher costs in 2010: Fitch 17.02.10
As part of its recent EMEA Basic Materials investor seminars, Fitch's Industrials group canvassed investor opinion on key chemical sector issues for 2010. Questions focussed on the impact of increasing cost pressure on Western European issuers' credit profiles, competitive pressures from new low-cost petrochemicals and polymers capacity in the Middle East and the prospects for debt issuances in the sector.
Below follows a summary of key discussion points.
Against a backdrop of rising cost pressures (notably oil, and higher feedstock costs), Fitch expects that, in line with the trends observed in H209, market conditions will continue improving in 2010, albeit modestly and from severely depressed levels. Most Western European issuers in the agency's rating universe derive at least two-thirds of their revenues from Western Europe and North America where Fitch expects lacklustre growth in chemicals demand this year.
The predicted fragile demand recovery, comparatively higher capacity utilisation rates, and the benefit of ongoing cost saving programmes implemented throughout the industry should combine to offset the negative impact of the higher input costs on profitability in 2010. While Fitch expects financial metrics across its Western European rated issuers to remain weak, the headroom under the ratings is likely to increase in 2010 on the back of comparatively stronger operating results and cash flow generation. Crude oil WTI average prices have gradually rallied from USD34 per barrel (bbl) in February 2009 to USD74/bbl to date and Fitch's price deck for 2010 is USD70/bbl. Producers' ability to pass through higher feedstock costs is a function of the 'value-added' content of their production and of market supply-demand balance. The latter weighs more materially on commodity chemical producers' pricing power and the agency views rising input costs as a potential challenge at levels of the value chain where overcapacity exists and where growth is expected to remain subdued.
Fitch notes that Western European issuers in its rating universe generally benefit from diversified portfolio mixes which limits the impact of weak product-specific market fundamentals. The threat of new low-cost capacity building up in the Middle East remains a key risk for European petrochemical and polymer producers. The new large-scale projects commissioned in 2008 and 2009 have not yet materially affected market dynamics in Europe due to technical delays and a surge in demand for polymers from China (imports up 50% year-on-year in 2009).
However, Fitch believes that European players remain particularly vulnerable to the new supply due to the competitive disadvantage of naphta-based feedstock and the relative geographical proximity of the Middle East to European markets. While the new capacity is not sufficient to replace European production, the agency expects further margin pressure and permanent capacity adjustments in Europe, reflecting producers weakening cost positions. In terms of debt capital market activity, all companies in Fitch's Western European chemicals investment-grade universe issued bonds during 2009 and aggregate issuances amounted to EUR7.4bn with BASF AG ('A+'/ 'F1'/Negative) accounting for EUR4.4bn of the total. Issuance levels were generally above and beyond individual refinancing needs and allowed companies to extended debt maturity profiles.
Liquidity is strong across the sector and supported by availability under unused committed bank facilities with no foreseen access restrictions. Sub-investment grade issuers Rhodia ('BB-'/Negative) and Cognis ('B'/Negative) have no near-term maturities and will not face bullet repayments until 2013. In conclusion, with little scope under existing ratings for debt-funded M&A activity and Fitch's expectation that the cautious approach to capex spending and shareholders' distributions will be maintained, funding needs should be limited and the agency does not foresee high levels of debt issuances in 2010.
Fitch's Basic Materials investor seminars took place earlier this month in London, Frankfurt, Zurich and Paris. Copies of the presentations, "EMEA Chemical Industry: On The Mend?" and "Liquidity and Refinancing Trends for Western European Chemicals", are available at www.fitchratings.com. Contacts: Myriam Affri, London, Tel: +44 20 7682 7148; Oliver Kroemker, Frankfurt, Tel: + 49 69 768 076 253; Frederic Gits, London, +44 20 7682 7359.
Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.