US climate rule to have modest impact on chemical credit - S&P

15 February 2011 23:47  [Source: ICIS news]

NEW YORK (ICIS)--US government actions to reduce greenhouse gas (GHG) emissions over the long term would only have a modest credit impact on most segments of the chemicals industry, global ratings agency Standard & Poor’s (S&P) said on Tuesday.

For the petrochemical and plastic resin subsectors, the key risk would be on raw material and energy costs in the form of higher natural gas prices as more utilities switched to that lower GHG-emissions energy source, according to a joint study by S&P and environmental think tank World Resources Institute (WRI).

“Energy-intensive commodity chemical subsectors depend heavily on natural gas-derived feedstocks, so they could face higher production costs,” said Kyle Loughlin, managing director and credit analyst at S&P.

“Higher costs could make these subsectors less competitive, lower export opportunities and ultimately weaken credit metrics,” he said.

The analysis focused on the impact of two types of federal climate policy scenarios – a cap-and-trade emissions reduction policy represented by the proposed 2010 American Power Act bill, and the Environmental Protection Agency’s (EPA) developing regulation of GHGs.

While the American Power Act failed to get traction in the US Senate, future legislation could incorporate aspects of that bill, noted Shally Venugopal, researcher at WRI.

Natural gas prices were estimated to be 7.5% higher in 2016 under conditions of the American Power Act compared with prices without the bill’s emissions restrictions.  The analysis did not take into account the impact of increased supplies of US shale gas, noted Venugopal.

The petrochemical and plastic resin subsectors would not face significant compliance costs through 2033 because of eligibility for free allowances under a cap-and-trade system, according to the analysis.

However, the impact on natural gas prices “could be problematic for petrochemical companies at the bottom of the cycle, as any incremental cost in such a commodity business would be detrimental to profit, and thus, credit quality,” said Loughlin.

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