EMEA chemical sector gets negative outlook
London, February 17, 2008
Moody's Investors Service holds a moderately negative outlook for EMEA chemical producers for 2008.
The outlook is largely driven by company-specific considerations, but also reflects the
view that top-line growth is likely to ease from 2007 levels, affected by less supportive demand conditions, said Moody's in its new Industry Outlook report.
Moody's assumes a moderate reduction in the rate of growth for EMEA chemical companies' European operations and some deterioration in the performance of US operations that are immediately exposed to underperforming end-markets, such as homebuilding and automotive manufacturers.
Operations in Asia and other emerging markets are expected to continue to enjoy a relatively good rate of growth in 2008.
Moody's expects the operating performance of EMEA chemical companies to remain sensitive to a number of long-term risks: continued pressure from high raw material and energy prices; a strain on exports caused by strong European currencies; sustained competitive pressure from international and emerging market producers; and shortening product life cycles.
"Overall, we expect a greater degree of differentiation in performance, with specialty chemical producers likely to experience margin pressures in 2008 and to be most affected by the anticipated lower demand from manufacturers," said Moody's analyst and author of the report Elena Nadtotchi.
In addition, Moody's notes that ongoing restructuring initiatives announced by several specialty chemical producers are likely to remain a constraining factor over the medium term.
While the current petrochemical cycle has likely peaked, limited capacity additions amid the delays of several Middle Eastern projects should provide further support to commodity producers into 2008. Taking into account recent corporate activity and a modest pace of de-leveraging achieved by leveraged buyouts in 2007, Moody's notes the need for a resolute reduction in debt to allow financial flexibility as the cycle turns.
Moody's further notes that share buybacks are likely to remain a significant feature of companies' risk profiles as management teams are pressured to deliver on their growth strategies and make more efficient use of their balance sheets with a view to enhancing value for shareholders.
The rating agency cautions that the recent spate of corporate activity reported in the sector has left several incumbents with limited headroom within their current ratings. – TradeArabia News Service