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Fitch on energy prices and US chemical producers

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Hydrocarbon Engineering,

Deflation in the energy sector has filtered through to lower prices for petrochemicals, plastics, and other chemicals with energy-related feedstocks, resulting in lower sales, earnings, and cash flow, according to Fitch Ratings. However, low North American natural gas and natural gas liquids (NGLs) prices should continue to be cost advantages for US chemical producers.

Despite the drop in oil prices, supply is anticipated to remain strong. Natural gas and NGL prices are expected to get an increase in demand due to rebased manufacturing capacity, chemical cracker expansions, and coal power plant retirements. However, this will not offset productivity gains in shale.

Despite oil price volatility, North American issuers in Fitch's rated portfolio continue to exhibit solid financial profiles and robust liquidity. The US chemicals sector is heterogeneous in composition; each subsegment has its own competitive dynamics and end-market exposure. Fitch believes producers should benefit from solid domestic demand in manufacturing and recovery in US construction and consumption. Strategic focus in the chemical sector continues around population trends for new product development and specialisation.

Non-diversified producers of intermediate commodity chemicals such as ethylene, propylene, and methanol have been negatively affected by the steep decline in oil prices. Pricing for derivatives further down the stream, such as polyethylene, have been more resilient as end-user demand has been strong in the top three North American end-markets: automotive and transportation, building and construction, and packaging. This has kept margins for integrated producers relatively healthy as feedstock prices remain near all-time lows.

The decrease in hydrocarbon derivatives should also benefit paints and coatings producers as these derivatives, particularly propylene, are used to create epoxies, resins, and latex, which are important raw materials for the industry. Fitch anticipates the decline in paints and coatings raw materials prices to be offset by solid growth in the residential and commercial repaint market and growth in nonresidential construction.

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