Europe chems spot prices, stocks stabilise but devaluation risks loom large

LONDON (ICIS)–European chemicals prices and stocks rebounded on Tuesday after one of the worst trading days in over a decade but downside risks remain on potential inventory devaluations that may weight down first-quarter financials.

Petrochemicals spot prices and crude oil futures were up in European morning trading, recovering from the heavy losses on Monday which knocked almost 10% off the value of some of Europe’s largest chemicals firms.

Europe main stock exchanges were also up on Tuesday. Even Italy’s FTSE MIB index was trading up on Tuesday despite emergency measures to extend lockdown measures, previously implemented in some northern regions, to the whole country in a bid to contain the spread of coronavirus.

Italian petrochemicals producers Versalis and Radici have said industrial operations and logistics remain unaffected, as travel restrictions do not apply to manufacturing operations.

Europe’s STOXX 600 chemicals index was trading up nearly 4% as of 10:45 GMT, with K+S the biggest gainer at 9.5%.

Umicore, OCI, Solvay, Johnson Matthey, LANXESS, Covestro, Victrex, and Evonik were all up at least 5% from Monday’s close.

The collapse on Friday (6 March) evening of a deal between OPEC+ countries to cut production further in response to the impact of coronavirus on demand roiled the global economy when markets opened on Monday, reacting with increasingly grim economic news on coronavirus to send investors into a panic.

Brent crude oil prices stood at the mid $30s/bbl in early Tuesday trading, remaining up from Monday’s closing settlement despite news that Saudi Aramco plans to increase output by over 2.3m bbl/day from February levels in April after slashing export prices over the weekend, signalling the onset of a trade war.

The implications of the sharp drop in crude pricing and ongoing coronavirus uncertainty have significant implications for European chemicals despite the market rebound on Tuesday, with both positives and negatives emerging from the extent of the moves.

Sustained low oil pricing could help petrochemicals players to increase margins, although the sharp crude oil price fall on Monday could cause European chemicals prices to fall by 10-20% in April contracts, according to ICIS analysis.

CHEMICALS CAPITALISATION
In the event of economic indicators continuing to skew to the downside, European chemicals companies could see an average of 50% wiped off their share price this year as worries over a global recession intensify, according to Credit Suisse.

Debt could become an issue if conditions remain extremely weak, with highly-leveraged companies potentially struggling to generate the earnings necessary to service debts and maintain capital expenditure programmes.

Moody’s last week downgraded its credit rating for South Africa’s Sasol, laden with debt from its beleaguered Lake Charles cracker project in the US and under pressure to generate earnings, on the grounds that the company’s leverage to earnings is set to peak in an extremely weak environment.

The extent of the price falls could result in perceptible inventory devaluation effects, which could lead to impairments and write-downs in first-quarter financial results, according to Baader Bank analysts.

Producers with more commoditised value chains are the most exposed, while cheaper basic chemicals could result in lower raw materials costs for players located further down the value chain such as AkzoNobel and Clariant.

The bearish market could also result in goodwill impairments on the value of the oil and gas assets held by chemicals producers, such as Solvay’s Chemlogics arm, which is particularly exposed to a US shale industry downturn, as well as Brenntag’s oil and gas chemicals distribution business.

BASF said last month that it is still hoping to take its Wintershall Dea oil and gas joint venture public in the second half of the year if market conditions allow, but projections on oil pricing from ING bank this week do not foresee crude prices rising above $45/bbl this year.

Chemicals players could see a significant uplift if conditions move back towards the mid-cycle, Credit Suisse added, with cyclical companies such as Covestro the best-placed to benefit from unexpected market improvements.

Front page picture: Health checks at the Brenner Pass in the border between Italy and Austria
Source: Matteo Donagrandi/G NEWS/EPA-EFE/Shutterstock 

Focus article by Tom Brown