S&P: US chemical producers say natural gas prices hurting margins

By OGJ editors
HOUSTON, July 30 -- US chemical industry executives believe that volatile raw material prices and an uncertain economic recovery will delay an anticipated second half turnaround for their industry, Standard & Poor's Ratings Services reported.

S&P conducted an informal survey of financial executives at chemical companies that it covers. Nine of 14 respondents said they expect that higher, more volatile natural gas prices will hinder 2003 operating profits.

"The collective concerns expressed by rated chemical companies were consistent with
the negative credit rating trends and the still-high proportion of negative outlooks
in the sector," said S&P credit analyst Kyle Loughlin in New York.

Through the first half of this year, chemical company downgrades outpaced upgrades 15 to 1, and more than 40% of rated chemical companies have negative outlooks, S&P said. The report is entitled, "Rated North American Chemical Producers: 'Second-Half Turnaround? Not So Fast.'"

Natural gas prices
Nine of the 14 survey respondents said higher natural gas price trends could compress profit margins for chemical products.

"Companies with stronger business profiles or companies that benefit from differentiated products can be expected to ride out higher energy prices quite well, while less diverse commodity petrochemical companies will remain much more exposed to risk," Loughlin said.

In recent years, chemical producers have experienced what they consider "an unwelcome period" of escalating natural gas prices and more erratic gas price movements. That compared with relative stable gas prices during the 1990s, they said.

"The onset of more erratic prices had added another variable in an already difficult business environment, particularly given the limited pricing power available to most chemical producers," Loughlin said.

S&P does not expect relief from raw material cost increases until a sustained economic recovery leads to greater capacity utilization among chemical producers.

One survey respondent said that, "In the near term, the higher natural gas prices will be passed on to the end customer. The longer-term competitive position of the US chemical industry will result in lower demand for US production."

Increased US production costs could prompt increased imports into the US market for some chemical products. More than half of the respondents mentioned greater import competition from the Middle East and Asia.

Financial strategies
Most respondents plan to reduce costs in the face of industry challenges, and 10 of 14 said they will likely adopt more cautious financial policies until pressures subside.

"The majority of respondents also planned to remain largely on the sidelines when it
came to mergers and acquisitions, although more than half of the companies appear
ready to look ahead to better times indicating a modest increase in capital spending
in 2004," Loughlin said.

Survey responses also suggested that fears related to severe acute respiratory syndrome and the war on terrorism are perceived as not having a major impact on US producers' profits.