The Urethane Blog

Oil Price and Virus Shocks

Low oil price, coronavirus to weigh on US chem earnings – Moody’s

Author: Stefan Baumgarten


HOUSTON (ICIS)–The collapse in oil prices and the spread of the coronavirus will weigh on second-half performance across the US chemicals sector, reducing the likelihood of a strong post-virus rebound in 2020, analysts at credit watchdog Moody’s said in a report on Thursday.

Last week, OPEC and Russia failed to reach an agreement on production levels, which prompted a collapse in crude oil prices.

Meanwhile, on Wednesday the World Health Organization (WHO) declared the coronavirus (Covid-19) a pandemic.

The coronavirus’ continued spread will keep commodity prices soft, and will put more pressure on commodities already strained by new capacity additions, Moody’s said.

Specialty companies will also be hurt by lower demand, but this will be partially offset by the benefit from lower raw material costs.

Additionally, chemical companies with high exposures to industrial end markets will be impacted to a greater degree than those with more exposure to consumer-oriented end markets.

The lower oil prices flatten the global cost curve for ethylene producers in North America that use mostly gas-based feedstocks – compared to higher-cost naphtha-based producers in Europe, Asia, and South America, which use feedstocks tied to oil prices, Moody’s said.

US chemical producers, who rely on ethane and other natural gas liquids (NGLs) as feedstock, are vulnerable to low oil prices because their feedstock advantage starts to erode when crude prices fall in relation to those for natural gas.

Moody’s said that US ethylene chain margins already weakened over the past few years with a substantial increase in supply as major US producers started up new facilities on the US Gulf Coast.

“The decline in oil prices is likely to reduce polymer prices by April, especially after several major turnarounds in the US are completed,” the agency said.

Moody’s also said that credit metrics for most ethylene producers are weaker today than when oil prices fell significantly in 2015-16.

Oil prices sustained below $50/bbl could create some pressure on producers, and “ratings could be threatened if prices are sustained below $40/bbl”, the agency said.

Moody’s-rated US petrochemicals producers that could experience weaker metrics in 2020 include Chevron Phillips Chemical (CP Chem), LyondellBasell, Dow Chemical, Westlake Chemical, and NOVA Chemicals.

But the lower oil prices would also weaken prices for other commodity and industrial intermediate chemicals, particularly ethylene glycol, acetyls and oxo chemicals, along with such commodities as methanol, phenol and styrene, the agency said.

A price drop would cut profits for companies like Celanese, Eastman, Dow, Trinseo, TPC, Cabot Corp, Methanex and others, Moody’s said.

While most companies will be able to maintain credit quality, some, “such as Eastman and possibly Methanex could be vulnerable due to an extended decline in commodity prices lasting more than 18 months”, Moody’s said.

Specialty companies will be more insulated from an oil price slump, although low oil prices will hurt companies such as Kraton, which make products that compete directly with oil-based products, and Vantage Specialty Chemicals, because the demand for oleochemicals used in oil and gas applications soften.

Other specialty companies that would get hit by low oil prices include Hexion and Cabot Microelectronics, which supply the oil and gas industry with products such as additives for proppants, surfactants for fracking fluid, and drag reducers for pipelines.

“A common theme in these cases is exposure to the US oil and gas industry, which has weakened since the last step-down in oil prices,” Moody’s said.

Other specialty producers that limited their exposures to the oil industry after oil prices dropped below $50/bbl in 2015-16 will be less hard hit by sustained low prices.

Moody’s cited Ecolab, which spun off its more volatile energy-related business, Koppers, which moved away from the carbon black feedstock business, and Univar, which reduced its exposure to oil prices through mergers and acquisitions.

Specialty chemical companies that focus on coatings, consumer care, high-performance polymers and lubricants would benefit from lower oil prices – though lower demand would offset much of the benefit, Moody’s said.

At the same time, the spread of the coronavirus weighs on the chemical industry, where producers “depend highly on economic growth”, Moody’s said.

The agency’s current macroeconomic forecast, published just before the oil-related announcements and reports of the increasing spread of the disease within the US, estimates 2.1% GDP growth for the G-20 economies, down from an earlier forecast of 2.4%, and a much higher risk of global recession.

Although fiscal and monetary policy measures will likely limit the damage in individual economies, Moody’s now expects even weaker GDP in 2020 for countries that are key for the chemical industry – including the US, falling to 1.5% in 2020 from 2.3% in 2019; the euro area, to 0.7% in 2020 from 1.2% in 2019; and China, to 4.8% in 2020 from 6.1% in 2019.

“We expect that chemical producers will be hard hit through the first half of 2020, with a number exposed specifically to China, but continued spread of the coronavirus would likely further reduce our current expectations for 2020,” the agency added.

Additional reporting by Al Greenwood