North America, EMEA chemicals average earnings could fall 20% in 2020 – Moody’s

Tom Brown

12-May-2020

LONDON (ICIS)–Average chemicals sector earnings in North America and Europe, the Middle East and Africa (EMEA) could fall by around a fifth year on year in 2020 as a result of coronavirus disruption and the severe downturn expected for May and June, according to US ratings agency Moody’s on Tuesday.

The financial results season for the first quarter has revealed that demand for many producers in the two regions held up relatively well in the first quarter despite disruption in Asia Pacific at the start of the year and widespread lockdown measures in home markets in March.

The downturn projected by Moody’s for the next two months is likely to be most keenly felt by commodity chemicals and producers of plastics for industrial applications, with capacity utilisation reductions or idled facilities expected to reduce excess supply and inventory levels.

The disparity between bulk chemicals and more specialised producers is underscored by projections of 30-50% falls in earnings before interest, taxes, depreciation and amortisation (EBITDA) projected for some commodity chemicals producers and drops of under 5% for firms serving consumer goods, packaging and medical application markets.

Within commodities, pigment compound titanium dioxide (TiO2) is likely to see comparatively modest demand drops compared to ethylene, styrene, polyethylene (PE) and polyvinyl chloride (PVC) producers, which could see demand drops of 40%.

Specialty chemicals producers with stable end markets are likely to be less impacted, although any exposure to automotive, aerospace and oil and gas markets are likely to see a toll, particularly Solvay and Hexion, according to the agency.

Commodity and intermediate chemicals producers with industrial end markets such as Dow Chemical, INEOS and Huntsman are likely to post EBITDA drops of more than 20% this year, Moody’s added.

“The EBITDA decline for companies that produce commodities for industrial applications is likely to be more severe, with recovery in demand expected to be slower,” it said.

“While there are some bright spots in consumer-related plastic packaging or medical end markets, demand for most commodities is tied to industrial applications, capital goods or durable consumer goods,” the agency added.

China, which went through the initial peak of coronavirus infections ahead of the rest of the world, could provide a guide to what lies ahead for North America and EMEA, with a sharp contraction followed by rapid recovery, on the basis of purchasing managers’ index (PMI) data from the country.

Western economies have suffered sharper contractions and are likely to face a slower path back to more normalised demand levels.

Infection and mortality levels from the virus have been higher in the west and governments are largely moving to partially reopen economies with higher daily death counts than in countries such as China, Vietnam and South Korea.

China’s road to recovery also remains a painful one, with the Caixin manufacturing PMI slipping back into contraction at 49.4 points in April compared with 50.1 points in March due to weaker export orders as a result of the outbreaks raging overseas.

A reading below 50.0 points shows contraction in activity.

Front page picture: The Deer Park petrochemicals complex in Texas
Source: David J Phillip/AP/Shutterstock 

Focus article by Tom Brown.

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