Commentary: Weak macros pressure US chemical credit ratings

The US chemical sector’s credit ratings could come under pressure on falling commodity prices, US dollar strength and slowing global economic growth.

On 27 January, credit ratings agency Moody’s Investors Service placed the ratings of three US-based titanium dioxide (TiO2) producers – Tronox (B2), Kronos Worldwide (Ba3) and Chemours (Ba3) on review for downgrade. The ratings are already in the speculative grade (or junk) category.

“The review for downgrade reflects the ongoing weakness in TiO2 markets and resulting stressed metrics for each of the TiO2 producers.” said Joseph Princiotta, senior analyst at Moody’s.

The review also reflects “growing concerns across commodity markets in general against a backdrop of a cautious economic outlook and concerns about China’s economy, and how a slowdown there might affect local demand and exports of TiO2,” Princiotta added.

In a 26 January special report, Moody’s warned about the impact of deteriorating macro conditions on the chemical sector but also noted that liquidity remains relatively solid.

“We have previously cited an unusual and growing disparity in profitability that developed in the chemicals industry during 2015 and now expect that certain sectors… will be pressured by an extended downturn in commodity prices,” said Benjamin Nelson, senior analyst at Moody’s.

“Moody’s expects this trend will intensify in light of expected deterioration in several downstream industries (metals, mining, construction, steel) and significant exposure to slowing emerging markets,” he added.

And the global economic outlook is less than inspiring. The ratings agency expects modest growth in the US and Europe, continued recession in Brazil and Russia, and slowing growth in China – about the consensus view and certainly not disastrous in and of itself.

Yet commodity chemical producers are poised to feel the brunt of the pain. Overcapacity has emerged as companies have been slow to shut down or idle capacity in response to lower-than-expected demand, especially from the slowing in China.

“China’s ongoing transition to a consumer-led economy will reduce the demand for some commodity chemicals over the next several years,” said Nelson. “The impact of a slowing economy in China is particularly evident in overcapacity situations that have developed in titanium dioxide, chlor-alkali/PVC (polyvinyl chloride), methanol and organosilicones.”

One positive for now is that chemical debt prices have not collapsed, as has been the case with the energy, and metals and mining sectors (see table).

ROOT CAUSES OF SLOWDOWN

As for the global economic slowdown, rather than being transitory, it may be something the industry will have to get used to, for an extended period.

The global economy is continuing along the path of the “Great Unwinding” following the withdrawal of major stimulus programmes in the US and China, contends Paul Hodges, chairman of UK consultancy International eChem.

This Great Unwinding has manifested in slowing China economic growth, and the collapse in crude oil and other commodity prices. And it’s not just about the removal of stimulus and China’s shift away from an export-driven economy, but long-term global demographics.

“Attention will now turn to the real cause of the growth slowdown now under way – the fact that 1bn people are now moving into the lower-spending, lower-earning, New Old 55+ generation,” said Hodges.

“They will be an unprecedented one in five of the global population by 2030. We suggest this means deflation is becoming almost inevitable, as the excess supply created by the stimulus policies cannot be absorbed,” he added.

For central banks, it’s one thing fighting a “normal” cyclical downturn with fiscal stimulus and loose monetary policy, but another fighting demographics. The latter will be swimming against the tide.

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ICIS and International eChem are publishing a new study: “How to survive and prosper in today’s chaotic petrochemical markets: Five critical questions every company and investor needs to answer”. The study covers the olefins, aromatics and polymers markets. See how feedstocks and product supply and demand will impact your business and investments over the next 10 years. Visit www.icis.com/services/consulting/scenario-planning/supply-and-demand-study