Bangkok--4 May--Moody's Asia
Moody's Investors Service -- in a new report -- sees a stable outlook for the Asian petrochemicals industry (ex-Japan) over the next 12-18 months, but adds that within the sector, divergence exists as some products show more favourable prospects than others, given varying demand/supply dynamics.
"We expect an overall stable outlook to prevail in the near term," says Helen Li, an Analyst at the Moody's Hong Kong office and author of the new report, adding, "Solid economic trends and demand will balance the additional capacity coming on stream over 2006-2007."
However, within the sector, business risks also differ, depending on each company's respective product portfolios, the markets served, feedstock positions and product cycles.
The report on Asia's petrochemicals sector is entitled, Outlook Stable, but Challenges Evident, and focuses on the industry's major trends and their impact on the key rating drivers for petrochemicals companies.
In the new report, Li also examines Moody's rating methodology for petrochemicals companies and its specific applicability to Asia. In this regard, the report notes that chemical companies are, in general, characterized by diversity, cyclicality and relatively high business risk, particularly commodity chemical firms.
Moody's has published ratings on three petrochemicals companies in Asia (excluding Japan), PTT Chemical Public Company Limited (PTT Chemical, Baa3), The Aromatics (Thailand) Plc (ATC, Baa3) and Continental Chemical Holdings Ltd (Continental, B1). The rating outlook for PTT Chemical and ATC is stable. The negative outlook for Continental reflects Moody's concerns over its relatively weak liquidity profile.
In the report and with reference to key rating considerations, Li discusses specifically five themes that will influence credit quality in the next 12 months: 1) Market conditions, the feed-to-product spread; and their influence on profitability and cash flows; 2) Expansion plans and their impact on business profiles; 3) The large capex associated with the expansion plans, and their impact on financial strength; 4) M&A activities and related event risks; and 5) Liquidity management.
Furthermore, persistently high crude oil prices remain a source of concern, the report says. Such prices are pushing up naphtha prices (the major feedstock for ethylene in Asia), and will possibly slow demand for downstream petrochemicals products. If oil prices remain high through 2006-07 such that demand slows down significantly, it would adversely impact the petrochemical market conditions given the on-going capacity additions.
In addition, the report says that it is imperative that producers are able to pass additional feedstock costs onto ultimate customers, particularly for segments with less favourable supply/demand prospects, and for the smaller un-integrated downstream players with weak bargaining power.
The report also notes that many Asian petrochemical companies have substantial capital-spending plans aimed at expanding capacity and/or achieving better integration. While these programs may further strengthen each company's operations/business profile, they also entail significant execution risks and will elevate financial risk and pressure liquidity
positions.
In its discussion on industry consolidation, the report says such a trend will continue, raising event risk and execution risk. In terms of rating implications, Moody's assesses mergers and acquisitions on a case-by-case basis and major rating considerations include size, funding structure, integration risk and other challenges (operational, regulatory and geopolitical).
Copies of the report can be found at www.moodys.com
Hong Kong
Helen Li
Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
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