North American chem companies on road to recovery - S&P

27 January 2010 17:50  [Source: ICIS news]

HOUSTON (ICIS news)--North American chemical producers are likely to see improvements in their credit quality this year after an unprecedented number of downgrades in 2009, Standard & Poor’s Ratings Services (S&P) said on Wednesday.

However, the industry is not out of the woods as North American commodity chemicals producers continue to grapple with contracting capacities and cost disadvantages compared with those of other regions, according to S&P’s "Top 10 Investor Questions: North American Chemicals" report.

On the whole, however, "We believe that the sector is building solid momentum going into 2010, and that the worst of the downturn is in the past," said S&P credit analyst Kyle Loughlin.

S&P said several factors support its rosier view of industry credit quality, including a gradual economic recovery in 2010, a better outlook for raw material costs and stabilising financial profiles.

The ratings service also said it expected to see increased demand in key sectors of the economy including housing, electronics, consumer products, and automobiles.

“In the first half of 2009, chemicals sector credit quality declined considerably, and Standard & Poor's took an unprecedented number of downgrades, mostly among speculative-grade issuers, and recorded seven defaults,” the ratings service said.

Several highly leveraged issuers defaulted amid weakening operating results and adverse capital market conditions, S&P said.

During the first quarter of 2009, Foamex defaulted after it missed a scheduled interest payment, and Chemtura announced that it filed for Chapter 11 bankruptcy reorganisation, S&P said.

“In recent months, however, rating trends have turned more favourable,” S&P said. For all of 2009, issuer downgrades exceeded upgrades by 28 to 11, but since 30 June, the ratings service recorded eight upgrades to three downgrades.

The number of companies considered most at risk for downgrade has also steadily declined, SP said.

Companies that are likely candidates for credit upgrades this year include Lubrizol, Krayton Polymers, Hexion, NewMarket, Solutia and PolyOne, S&P said.

Despite the overall improvement in credit quality, S&P said it expected 2010 to be a weak year for North American commodity petrochemical producers.

Global capacity additions in the ethylene chain, led by the Middle East and Asia, will peak in 2010 before eventually moving back to below projected demand growth for the next few years, S&P said.

“Therefore, in our view, global operating rates in some petrochemical categories may not improve meaningfully until at least 2011,” the ratings service said.

The situation will put more pressure on US and European producers to cut back their capacities and to shut down some of their less efficient plants, S&P said.

The new capacities additions in the Middle East and Asia will put higher cost producers in the US and Europe at a competitive disadvantage. US producers will be at less of a disadvantage than European producers, however, because of low natural gas feedstock costs, S&P said.

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By: Brian Ford
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