NEW YORK--(BUSINESS WIRE)--The 2016 sector outlook for North American chemicals is stable, according to Fitch Ratings. Producers are benefiting from solid demand in domestic manufacturing and the recovery in U.S. construction and consumption despite the sector being comprised of many heterogeneous products, each with its own competitive dynamics and end-market exposure.
Fitch expects producers to manage trade headwinds from weaker emerging markets and the stronger dollar, as well as commodity price deflation.
Fitch believes rating changes will be related to event risk from recapitalization events, divestitures or acquisitions rather than a slowing global economy.
More than 20% of revenues for some North American issuers come from EMEA, where demand growth is expected to be positive but weak. China is struggling to shift its economy toward consumption and away from construction and exports, resulting in sharply lower growth. Brazil and Russia are in recession and their currencies have sharply depreciated. The stronger U.S. dollar challenges exports and earnings upon translation but is less of a headwind for producers with local currency production, hedges or pricing power.
Commodities Price Fall Muted
Deflation in the energy sector has filtered through to lower prices for petrochemicals, plastics and other chemicals with energy-related feedstocks, resulting in lower sales, earnings and cash flow. After three bumper crops in a row, crop prices are weak, pressuring farm economics and weighing on fertilizer, crop protection and seed prices. Low costs and/or strong market positions have resulted in resilient margins.
Low North American natural gas and natural gas liquids (NGLs) prices remain cost advantages as a result of strong supply, even after the drop in oil prices. The drop in oil has resulted in lower olefin prices, but integrated producers have benefited from better pricing dynamics as a result of robust demand for downstream polymers.
Prolonged Excess Supply
Productive capacity has been increasing with China's drive for self-sufficiency in construction and agricultural chemicals, expansion of low-cost olefins and ammonia production in the U.S. and potash in Eastern Europe and expectation for strong growth in the emerging markets. The downturn in emerging markets has resulted in excess supply for some chemicals, hurting pricing, earnings and cash flow.
Capital Allocation Favors Shareholders
Issuers tend to generate healthy operating cash flows, which had been accumulating following the global financial crisis to support liquidity and acquisition strategies. More recently, activist shareholders are looking for a return of capital, and in some cases, recapitalization or breakup. Chemical producers seek to keep strong liquidity and flexible capital structures given their value to venders, offtakers, and parties approving permitting and reclamation.
Additional information is available at 'www.fitchratings.com'.
2016 Outlook: North American Chemicals (Managing the Macro)