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- Dubai 05:23 06:36 12:34 15:53 18:25 19:39
Fitch Ratings yesterday said production cutbacks and capacity shutdowns in the automotive and original equipment manufacturing (OEM) sectors, as well as declining industrial output and a slowdown in construction, are painting a bleak 2009 demand picture for chemical producers in Europe, Middle East and Africa (Emea).
Against depressed demand and uncertain economic backdrop, volatility in feedstock costs and FX will present additional challenges for Emea chemical producers.
Given the sudden and pronounced nature of the downturn, near-term visibility on market conditions and issuer guidance for the cyclical sub-segments of the industry (petrochemicals, plastics, synthetic rubbers, coatings, paints) is limited.
The agency views the downside rating pressure for issuers exposed to these specific sub-sectors as high should market and/or economic conditions deteriorate beyond levels currently envisaged.
Fitch expects volume contraction in petrochemicals, polymers and plastics year-on-year, in line with the erosion in key-end market demand and with the trends observed in fourth quarter.
The agency notes the distorting effect of significant customer de-stocking following the sharp fall of crude oil prices from all time highs of $127/barrel on average for FOB North Sea in Q308 to levels of around $41/barrel in December, which have been unseen since mid-2004.
Petrochemical, polymers and plastics prices have also declined with LDPE and HDPE contract prices falling by 40 per cent to 50 per cent and plastics prices (EPS, PET, ABS, PVC) dropping by 20 per cent to 30 per cent over the quarter from the record high levels of Q308.
While Fitch expects inventory corrections to lift demand and prices from Q408 levels in first quarter in 2009, any price recovery is likely to be constrained by weak buyer sentiment.
In response to these challenges, most producers with exposure to commodity chemicals and plastics in Fitch's Emea rated universe have adopted measures to cut down inventory levels and adjust production by reducing operating rates and temporarily idling capacity.
Trading results for January 2009 indicate that market conditions remain very challenging and Fitch expects the measures initiated in 2008 to be continued through 2009.
The agency believes that producers will intensify their focus on cash preservation with priority given to cost-cutting programmes, selective Capex spending and reduced shareholder distributions. Fitch does not expect these measures to fully absorb the impact of the downturn and forecasts a deterioration in margins, operating earnings and cash flow generation across the sector.
Portfolio diversification and exposure to downturn resilient end-markets such as fine chemicals (consumer chemicals, pharma, nutrition), agro chemicals (fertilisers, crop protection) and industrial gases should provide some earnings stability for companies, the report said.
For petrochemical producers, weak demand will be compounded by competition from substantial new low-cost ethylene capacity coming onstream in the Middle East and Asia in 2009.
Middle East producers such as Sabic should be able to maintain high operating rates through the year, the report said.
However, they are likely to see some margin compression as a result of the sharp drop in prices from 2007-2008's record levels.
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