Chemical Industry Outlook Negative as Demand Remains Weak

24 Nov 2009 • by Natalie Aster

The outlook for the chemical industry globally continues to be negative, Moody's Investors Service said in a six-month update on the industry. The negative outlook largely reflects Moody's expectations for limited volume growth, excess industry capacity and concern that raw material prices may increase prior to meaningful increases in demand, threatening performance.

"Although there has been a rebound in the last two quarters, producers continue to see limited future chemical demand, and we expect pressure on fourth-quarter 2009 results as downstream industries minimise their inventories towards year-end," said James Wilkins, Moody's Vice President and Senior Analyst. "This will mute the improvement from the distressed demand levels of 2008."

Commodity prices, which were low in late 2008 to the benefit of the chemical companies, have partially rebounded. Moody's says strong demand growth in Asia could put more pressure on global commodity prices before demand in the U.S. and Europe fully recovers, keeping margins tight in 2010.

Low capacity utilisation rates and weak selling prices could also squeeze producers' margins and cash flows over the near term, Moody's said.

Rebounding some, chemical production should track forecasted growth in industrial production in Europe and the U.S. in 2010.

Industrial production, a key to chemical demand, must recover for the chemical industry to recover, Moody's said.

"Any unanticipated event that stalls the recovery in industrial production will likely have a significant impact on most chemical companies," Wilkins said. "Also, the weak demand and modest recovery will not give chemical companies much opportunity to pass through raw-material cost increases."