Economic woes raise default risk for chems - S&P

11 February 2008 18:40  [Source: ICIS news]

HOUSTON (ICIS news)--Rising risks of default will be among the top trends affecting the US chemical industry this year, Standard and Poor's Ratings Services (S&P) said on Monday.

The deteriorating US economy plays a large role in nearly all of the firm's predictions. As a result, S&P expects the median rating for the sector will drop to B from BB-.

S&P is expecting more defaults in the chemical sector due to sluggish growth in the US economy, slower growth in manufacturing and ever-rising costs in raw materials. In addition, companies will contend with tight credit markets and increased aversion to risk, S&P said.

The companies with the greatest risk of default are those with the most exposure to the US residential construction market, S&P said. Already, the firm has lowered the ratings of polyvinyl chloride (PVC) producer Georgia Gulf and titanium dioxide (TiO2) maker Tronox, both of which have suffered as a result of the housing slump in the US.

S&P listed other trends connected to the general slowdown in the US economy.

Margins will tighten as a result of falling demand and rising energy costs, S&P said. The faltering US economy could dampen earnings, which would discourage chemical companies from repurchasing shares.

Companies with more exposure to the US economy will face more challenges, S&P said. Highly leveraged companies could falter.

The economic downturn could open up some opportunities for acquisitions among large chemical companies, the firm said.

Those businesses have strong balance sheets as a result of several strong years, S&P said. In addition, the weakened US dollar could make the nation's companies attractive targets to foreign investors.

At the same time, the worsening economy could discourage private-equity firms from making mergers and acquisitions (M&A), meaning that foreign investors and chemical companies will face fewer competitors for such deals.

Standard and Poor's also listed trends that are more specific to the chemical industry.

Fertilizer and agrochemical producers will continue to benefit from the global boom in agriculture, it said.

Commodity petrochemical producers in the US and western Europe will face increased competition from new capacity in the Middle East and the Asia Pacific region, the firm said.

Competition, along with rising energy costs and deteriorating economic conditions, will weaken performance in 2008, S&P said. Producers will likely respond by consolidating and reducing capacity.

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Author: Al Greenwood
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