Sector News

Moody’s cuts chemical industry outlook to negative

September 18, 2019
Chemical Value Chain

Moody’s Investors Service (New York, New York) on Tuesday today cut its outlook for the chemical industry to ‘negative’ from ‘stable,’ implying worsening business conditions and credit quality in the industry. The agency cited weak manufacturing, substantial risk of recession in Europe, and some cyclical softness as reasons for the negative outlook.

The report says that EBITDA generated by chemical companies is expected to down by 5–9% this year, and roughly flat in 2020. “The negative outlook reflects the weaker global manufacturing sector and declining chemical production volumes in Europe, as well as downside risks from the US-China trade dispute,” says Joseph Princiotta, senior vice president at Moody’s.

Manufacturing production and sentiment has been declining in the United States, Europe, and China, Moody’s says. US manufacturing growth was negative over the past two quarters, which qualifies as a manufacturing recession. “While manufacturing accounts for only 11% of US GDP, there is a risk of spillover to jobs figures, consumer sentiment, and business investment,” the ratings agency adds.

The US-China trade conflict is playing a key role in the difficult environment for manufacturers. “Tariffs remain at the center of global manufacturing stress and macro uncertainty,” Moody’s says.

As demand declines due to economic conditions, the ethylene market is entering a cyclical trough. “We expect the ethylene-polyethylene chain cycle to weaken in the second half of 2020, as new capacity comes online in the US Gulf,” Moody’s says. “Higher demand and tighter markets for ethane, the key raw material for Gulf crackers, will exacerbate margin pressure and is unlikely to abate until new ethane fractionation and transport capacity starts up in the first half of 2020.” Operating rates are expected to fall into the mid-80% range, after mostly hovering around 90% over the past several years.

For specialty chemicals, the outlook is “tepid and mixed, given slower global economic growth,” Moody’s says. Weak demand from the electronic and automotive sectors has taken a toll, although some bounceback is expected in electronics next year. Coatings volumes are also expected to be tepid, but lower raw material costs should support some margin expansion. Other sectors, such as personal care, water treatment, and flavors and fragrances, are expected “to show moderate growth and are more defensive in nature,” Moody’s notes.

Moody’s also revised its outlook to ‘negative’ for the manufacturing sector overall. “Our revised aggregate EBITDA forecast for the global manufacturing industry calls for no growth in 2019 and flat to about 1% growth in 2020, a fraction of the rates we anticipated earlier this year,” says David Berge, senior vice President at Moody’s. “Moreover, we believe there is a growing likelihood of further downward EBITDA adjustments over the next year as many segments in this industry will be challenged by emerging headwinds.”

By Vincent Valk

Source: Chemical Week

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