Europe healthy chemicals spreads, run rates to continue through H1

Author: Jonathan Lopez

2021/03/19

LONDON (ICIS)--European chemicals high run rates and margins are here to stay at least through the first half of the year, propping up producers’ earnings, investment bank Credit Suisse said on Friday.

In its quarterly Supply Chain Tracker, chemicals equity analysts at Credit Suisse said however that producers in downstream, more specialty chemicals-focused sectors may face headwinds throughout the year as “pricing versus raw materials” are set to dent their profitability.

Analysts at credit rating agency Moody’s also said on Friday the planned large-scale methyl methacrylate (MMA) plant by Germany’s Roehm in the US Gulf would prop up its earnings as that market is set to recover quickly after the pandemic.

EUROPE CHEMICALS: PARTY NOT OVER YET
European petrochemicals have been posting price highs for months as tightness has become the norm in many markets, caused by unplanned outages, healthy demand as manufacturing in the region performs well, and tightness in other regions reducing imports into Europe.

Credit Suisse’s Supply Chain Tracker looks at demand/inventory levels and supply chain analysis across commodity chemical products, analysing product spreads and long-term outlooks for key commodity products in European chemicals.

“Importantly, whilst product spreads have remained robust throughout the [first] quarter, they remain above mid-cycle and the rate of exit run-rate of improvement is moderating (at high levels),” said the analysts at the bank.

“This suggests upside earnings risk for the upstream chemical names throughout Q1 and significant H1 positive earnings momentum.”

Commodity chemicals, which benefit when crude oil prices are low, are set to post a “significant normalisation” in spread throughout the rest of the year, added the bank, a fact that would suggest “temporary overearning” due to prior customer restocking and above-average outages registered in the first quarter.

“For the downstream players [specialty chemicals], pricing vs raw material remains a significant headwind throughout the year albeit likely to mitigated by price rises and raw material inputs based off longer-term contract pricing (more limited pricing inflation to date),” said Credit Suisse.

While most companies have said they expect a return to more average operating conditions in the second half of 2021, the bank’s analysts were more bullish on the back of the European chemicals’ current trading premiums to both the broader European stocks and to the US chemicals stocks.

“The European chemicals sector is trading at [around] 39% premium to the broader European market and a 17% premium to US peers,” they concluded.

ROEHM US MMA PLANT: GOOD TIMING
US credit rating agency Moody’s changed on Friday its credit outlook for German chemicals producer Roehm, from negative to stable, after the producer’s 2020 financials exceeded expectations as demand for MMA, one of its key products, recovered towards the second half.

Roehm is well placed to go ahead with a 250,000 tonne/year MMA plant in the US Gulf Coast, said Moody’s, after the company said in February it would take a final investment decision [FID] for that project in the first half of this year; the project will be developed with OQ Chemicals (former Oxea).

The project, first disclosed by ICIS in October 2019, is set to tap into growing demand for MMA, a material which is polymerised to make homopolymers and copolymers, with the largest application being the casting, moulding or extrusion of polymethyl methacrylate (PMMA) or modified polymers.

The size of the plant is considered large scale in the MMA market, and it would also tap into the vast feedstocks in North America resulting from the shale gas boom.

Roehm has not provided capital expenditure (capex) estimations for the plant, but Moody’s said on Friday it would stand at €430m.

MMA demand recovered in the second half of 2020, said Moody’s, as supply in North America and Europe tightened, supporting the company’s earnings in a situation likely to continue this year.

“Moody's has changed the outlook to stable from negative against a stronger-than-expected operating performance in 2020, EBITDA [earnings before interest, tax, depreciation and amortisation] contributions from its excellence programme and strong liquidity that will support funding of Roehm's LiMA project [in the US Gulf Coast],” said Moody’s.

LiMA is Roehm’s MMA propriety production technology.

“The recovery in demand from key end-markets such as automotive and construction is likely to last throughout 2021. Additionally, higher capacity utilisation will support margins. Efficiency measures should result in additional EBITDA contributions in excess of €50m in the next 12-18 months,” added the credit rating agency.

Moody’s said that despite the hefty bill for the plant increasing Roehm’s capex notably, the compay’s gross leverage would actually fall as earnings improve and cash balance is healthy.

“The expected payment of at least €64m related to deferred considerations from Roehm's previous owner Evonik in 2021 will further support liquidity,” said Moody’s.

“However, the high capital expenditures required for the planned LiMA facility will constrain FCF [free cash flow] over the coming years.”

The agency concluded arguing that Roehm’s owners, fund Advent International, could however accept higher levels of debt than other producers who are publicly listed on the stock exchange.

“Moody's would like to draw attention to certain governance considerations with respect to Roehm … As is often the case in highly-levered, private equity sponsored deals, [Advent] has a high tolerance for leverage and governance is comparatively less transparent,” it said.

Front page picture: Existing OQ Chemicals facilities in Bay City, Texas, where Roehm is mulling to build its MMA plant
Source: OQ Chemicals