According to Moody’s Investors Service, business conditions in North America and EMEA will remain stable through mid-to-late 2015. Companies’ earnings before interest, taxes, depreciation and amortization (EBITDA) will rise by approximately 2.5 – 3.5% on average. The stable outlook implies that Moody’s expects earnings over the next 12 – 18 months will be within plus 10% or minus 10% of current levels.
Moody’s considers the weak earnings that many chemical companies reported in early 2014 an anomaly, and earnings should improve later in the year. Sales volume year-over-year growth was small for US companies. Unusually severe weather limited gains in retail sales, housing and construction. European companies generally experienced better sales volume growth, approximately 4%, even in a weak pricing environment (as revenues suffered the euro’s strengthening year-over-year against the US dollar.
Europe’s recovery will support earnings growth
According to Moody’s, Europe’s chemical companies will benefit from a healthier economic environment at home and improving demand from abroad, driving sales volumes modestly higher – up 3.1% in the first quarter of 2014, compared to a year earlier, even as chemical prices in Europe dropped 2.8%. Improving business sentiment and a better operating environment also boosted average utilisation rates in the industry, which rose to 81.2% in the first quarter of 2014, compared to 78.9% a year ago.
Moody’s highlights that the profitability for European chemical companies will depend on their cost-cutting and restructuring activities. Unfavourable comparitive feedstock dynamics will continue to drive European olefin producers such as BASF and Ineos to restructure operations. European olefin producers are hurt by their high feedstock costs compared to competitors in North America and the Middle East, as well as low cost product pricing and pressure from imports.
Some producers may import ethane as a feedstock to secure the viability of operations in anticipation of additional low cost supply from North America that is expected for 2016 – 2017. In addition, low capacity utilisation rates will continue to weigh on profit margins for European olefin producers, which will see only limited improvement in demand in 2014 -15. Moody’s holds that their profitability will only improve after some of Europe’s ethylene capacity closures take effect.
North American feedstock advantage benefits commodity producers
North American chemical producers will continue to enjoy feedstock and energy advantages from low cost natural gas and NGLs. The shale boom will keep feedstock supplies abundant and prices low over the next three to five years.
Ethane, a key feedstock for producing ethylene, traded below the cost of natural gas in North America for much of 2013 – 14, as a result of supply being greater than demand. A large price spread between ethane and naphtha allow North American ethane-based ethylene production to be exported profitably to Europe and Asia, where most production relies on naphtha feedstocks.
North American ammonia, methanol and ethylene producers have been the largest beneficiaries of low cost natural gas and NGLs. These companies will continue to generate higher profit margins than their peers in Europe and Asia. US ethylene producers using light feedstocks such as ethane and propane are the lowest cost producers globally except in the Middle East. This advantage will continue to allow North American producers to operate near full capacity and profitably export any products not consumed locally.
Adapted from a report by Emma McAleavey.
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