Moody’s: Negative Outlook for U.S. Chemicals Companies

The effect of high oil prices is working its way through to chemicals companies, resulting in a negative outlook for most parts of the industry, according to Moody’s. “Due to the rising cost of oil and energy and flagging consumer demand, the credit outlook is negative overall for chemicals manufacturers in the U.S. and Canada.”

In an exception to the general negative trend, chemicals companies in some segments, such as agriculture and industrial gases, will continue to exhibit stronger profitability despite feedstock cost increases and weaker US growth, Moody’s says.
Companies directly exposed to certain feedstock and energy costs that have increased precipitously include VeraSun, Aventine, Reichhold, Tronox, Cristal, Solutia, Kraton, Dow, LyondellBasell, FiberVisions, Huntsman, INVISTA, Hexion, Chevron Phillips, Lubrizol, NewMarket , Eastman, Rohm & Haas and DuPont.

Some specialty companies will be affected to a greater degree in the third and fourth quarters as higher costs work their way through the supply chain, including Chemtura, PPG, Valspar, RPM, Nalco, OMNOVA, Rockwood, PolyOne, Gentek, Ashland, Cytec, Hercules, and Cabot.

If these feedstock and energy prices remain elevated for the remainder of the year, the fourth quarter of 2008 could be very weak for most companies in the industry, with the exception of those in the agricultural and industrial gas sectors.
Moody’s said its primary focus will be on closely monitoring those credits that have significant exposure to commodity prices and limited ability to quickly passthrough cost increases (TRX, Cristal Inorganic, GGC, Arclin, Kraton, VeraSun, Aventine, OMNOVA).

Exports are one bright spot for some companies. The weak U.S. dollar, combined with natural gas and related feedstock prices that are low relative to prices in other developed countries, are having a positive effect on exports in certain sectors of the industry.

Companies with greater exposure to international markets or lack of exposure to commodity increases will be more likely to outperform their peers, including Celanese, IFF, Sensient, Mafco, Compass, and American Rock Salt.
Merger and acquisition activity in the chemicals industry is likely to center on strategic buyers over the next year, Moody’s says. Between the credit crisis, substantially higher feedstock costs and weaker growth forecasts, financial sponsors will likely avoid the chemicals industry, even if they have access to the high-yield debt market.

Possible candidates for M&A activity include Dow Chemical (NYSE: DOW), which is looking to significantly increase its specialties business; Chemtura (NYSE: CEM), which is looking at “strategic alternatives”; Ashland (NYSE: ASH) which has a large cash balance and the desire to grow its specialties business; and NewMarket (NYSE: NEU), which is also looking to expand its specialty operations.