Specialty chemicals suppliers are likely to face less pressure on their credit quality than integrated or bulk suppliers, which are exposed to more commoditised products. Credit quality could improve if economic growth does not slow too drastically.
In the coming year, Scope sees half a dozen main trends for chemicals companies. “Integrated chemicals players will remain vulnerable to slowing economic growth due to the cyclical nature of their businesses,” says Klaus Kobold, associate director in the corporates team of Scope Ratings and author of Scope’s 2020 chemicals sector outlook. This includes low pricing power: prices for most basic chemicals and plastic resins are set by the market and are highly sensitive to prices of oil-based commodities.
“Aftermarket mix is one of the critical factors driving the credit quality of specialty chemicals producers,” Kobold continued. “Several European producers of specialty chemicals have used the long economic upswing to bolster balance sheets while pushing their activities up-market.”
Europe-based specialty chemicals producers are less indebted than their US-based counterparts so are better prepared to cope with a cyclical downturn in demand. In terms of corporate strategy, commodity-orientated players are likely to acquire downstream assets and weed out poorly-performing businesses at the same time as they focus on improving efficiency, including paying down debt
“That said, we believe European-based players will remain cautious on M&A, capital expenditure, dividends and share buybacks, compared to their US-based competitors,” Kobold concluded.