EMEA Chemicals Landscape 2019No content below the line EMEA Chemicals: Portfolio Evolution 7 Source:...
Transcript of EMEA Chemicals Landscape 2019No content below the line EMEA Chemicals: Portfolio Evolution 7 Source:...
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EMEA Chemicals Landscape 201921 May 2019, Tel Aviv
Copyright © 2019 by S&P Global.
All rights reserved.
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Today’s Presenters
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G. Andrew StillmanSenior Director, Analytical [email protected]
S&P Global Ratings, London
Andrew is a Senior Director at S&P Global Ratings and is currently the Analytical Manager for Chemicals, Materials & Construction portfolio.
Since joining the London based corporate ratings group in 2009, Andrew has been involved in a range of industries including 6 years as the global sector co-ordinator for business service companies. He also previously covered companies in the transportation and mining and oil & gas sectors.
Since joining S&P Global Ratings over 13 years ago, Paulina progressed through various roles in the Commodities team responsible for issuers in chemicals and metals & mining industries.
Paulina is responsible for Chemicals and Building Materials issuers in EMEA, covering several high-profile names including K+S, Yara International, Sika AG, LafargeHolcim and Israel Chemicals Ltd.
Paulina GrabowiecDirector, Lead [email protected]
S&P Global Ratings, London
Hetain MistryLead Analyst, [email protected]
S&P Global Platts Analytics, London
Hetain is a Lead analyst for petrochemicals for S&P Global Platts Analytics. He is responsible for the global short and long term market analysis and polyolefin and aromatics publications.
Hetain has close to 15 years’ experience within the oil, NGL and petrochemical consulting and analytics industry in London and in Singapore, working on various market studies across refinery and petrochemical value chains for all regions.
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Agenda
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• EMEA Chemicals Ratings Landscape
• Outlook On The Fertilizer Industry
• Global Polyolefin Outlook
• ESG in Credit Ratings
• Q&A
Paulina Grabowiec
Paulina Grabowiec
Hetain Mistry
G. Andrew Stillman
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EMEA Chemicals Ratings Landscape
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Global Chemicals: Trends And Outlook
• The chemical sector's rating outlook swung into neutral territory briefly in 2018 and in the first part of 2019, after yearsof negative bias.
• Prices for especially volatile commodity chemicals, including titanium dioxide, and fertilizers were stable to improving in2018. Some commodity chemicals prices have benefitted from the closure of capacity in China as part of thegovernment's focus on environmental issues.
• Agricultural markets in general in 2018 have been in better shape relative to 2017, especially in Latin America. However,in the second half of 2018, the outlook bias turned negative again, albeit only slightly.
• As of 1 May 2019, negative outlooks slightly outnumbered positive outlooks.
Developing, 1%
Negative, 8%
Positive, 4%
Stable, 85%
WatchNeg, 1%
WatchPos, 2%
Ratings outlooks data as of May 1, 2019.
Apr-19
-25
-20
-15
-10
-5
0
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Net Outlook Bias (%)
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EMEA Chemicals: Trends And Outlook
6
Source: Standard & Poor’s Ratings Services. Based on 47 public credit ratings in Chemicals as of April 23, 2019.
• The rating outlook in EMEA is largely stable as of April 2019 (87%) and compares well with 85% globally.
• We took a number of rating actions over 2018 and YTD April 30th 2019, with 6 issuers upgraded and 5 downgraded.
• Upgrades (Perstorp, Arkema, Lanxess, Specialty Chemicals International, and Oxea) reflected stronger performance andconsistent deleveraging, while downgrades (Linde, Acetow, Nitrogenmuvek, Akzo Nobel, Flint) followed weak operatingperformance, but also financial policy and M&A events. We revised the outlook to stable from negative on Sika AG (on anticipateddeleveraging) and PhosAgro (on improving outlook for fertilizers and stronger cash flows).
• The outlook bias is balanced as of April 2019, with 3 negative and 3 positive outlooks.
3
1 1
2
1 1
2
0
1
0
3
1
0
2
4
Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019
Upgrades Downgrades
17%
4%
79%
9%4%
87%
6%6%
87%
Negative trend Positive trend Stable
Dec 2017Dec 2018Apr 2019
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EMEA Chemicals: Portfolio Evolution
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Source: Standard & Poor’s Ratings Services. Based on approximately 50 public credit ratings in Chemicals as of April 23, 2019.
17%
24%17%
20%
2%
As of December
2017
15%
30%
20%
35%A category
BBB category
BB category
B category
CCC category
As of April 2019
• The share of credits rated in HY category (BB+ and below) increased from 39% in December 2017 to 55% as of April 2019.• A number of highly-levered or private equity owned issuers made their debut on rated public debt markets in 2018.• The portfolio is balanced between IG and HY credits.
0
5
10
A+ A A-
BB
B+
BB
B
BB
B-
BB
+
BB
BB
-
B+ B B-
CC
C+
December 2017 December 2018 April 2019
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2nd October 2018: Rating lowered to 'BBB+' on disposal of specialty chemicals business; outlook stable.Following the disposal of its specialty chemicals business to the private equity firm Carlyle and sovereignwealth fund GIC Private Ltd., in our view Akzo's business has reduced in size and scope. We consider a ratio offunds from operations (FFO) to debt of about 45%-60% as commensurate with the 'BBB+' rating.
2nd March 2018: ‘BBB-’ rated Syngenta’s rating was affirmed and removed from CreditWatch Negative. Theaffirmation reflects our view of Syngenta having a strategic role in the modernization of China's agriculture, asconfirmed in ChemChina's press release on Jan. 8, 2018, and our expectation that, if needed, ChemChina--and indirectly the government of China--would ensure timely and full payment of its debt obligations.
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16th November 2018: Long-term issuer credit rating raised to 'BBB+' from 'BBB'. The outlook is stable. France-based Arkema S.A. continues to post strong results despite the inflationary raw materials price environment. We now forecast adjusted funds from operations to debt to materially exceed 45% on a sustainable basis, thereby reducing the risk of acquisitions putting pressure on the ratings.
29th January 2019: Long-term issuer credit rating downgraded to 'A' on parent's financial policy; outlook isstable. We believe that Linde AG's current rating level is no longer supported by the group's financial policy,and that its credit metrics could weaken to ranges in line with our 'A' rating over time. We forecast its S&Padjusted funds from operations to debt at the higher end of the 35%-40% range in 2019-2020.
12th October 2018: Downgraded To 'B-' On Weak Operating Performance. The downgrade reflectsNitrogenmuvek's weak operating performance so far this year, leading us to significantly revise our forecasts.We now expect S&P adjusted debt to EBITDA of above 10.0x and FFO to debt of less than 5% in 2018,recovering to about 6.5x-7.0x and about 10%, respectively, in 2019. This is in contrast with our previousexpectations of adjusted debt to EBITDA below 6.0x and FFO to debt of about 12%, in both 2018 and 2019.
Key Rating Actions In EMEA Chemicals
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Capacity reductions in some commodity chemicals in China. Several regional, and in some cases, global markets for commodity chemicals have benefitted from a shutdown of capacity in China in 2017 and 2018, a contributory factor to either stability or improvements in the prices of products including urea, titanium dioxide, propylene oxide, and methyl tert-butyl ether. The shutdown relates to growing environmental concerns in China.
Disruptions to global trade: An escalated and protracted tariff war between the largest chemicals consumer in the world, China, and an increasingly important chemicals producer and exporter, the U.S., could hurt global chemicals prices, and potentially, demand from key end markets such as autos and general industrial. We do not factor this risk into our base-case scenario because of the uncertainty related to the still-evolving tariff situation between the two countries.
A sharp downturn in the global economy in 2019: Nearly a decade of demand growth, low interest rates, and generally friendly capital markets have created a climate that has spurred M&A, shareholder-friendly policies, and capacity growth. A sharp downturn in 2019 would provide companies with little time to adjust to a more challenging environment and could weaken their credit quality, especially at lower-rated speculative-grade companies, where cushions for such shocks are generally lower than at higher-rated investment-grade companies.
Chemicals Key Risks And Opportunities 2019
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Chemical Credit Outlook – Stable, But Risks Lurking
SPECIALTY
CHEMICALS
EBITDA broadly stable on unchanged supply-demand balance in most
products, cost-efficiencies, and demand at least in line with global GDP
with pockets of relative strength especially if linked to stable end-
markets.
COMMODITY
CHEMICALS
Margins could come under pressure due to major ethylene and PE
capacity additions resulting in overcapacity and lower prices. Similar story
for propylene, with new on-purpose capacity leading to lower prices and
mid-cycle conditions.
AGROCHEMS
Falling inventories and slowly improving grain prices, albeit from a low
level, should provide support to farm economics and demand for
fertilizers.
FERTILIZERS
Industry emerging from bottom of the cycle conditions, but delays to
planting season, regulatory environment, trade tensions, weak currency,
still weak farmer economics, gains in fertilizer use efficiency, and capacity
additions pose a risk to the strength of price recovery.
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Trend #1: Leverage Could Improve, But…
• Globally, we expect that stable EBITDA margins and modestly declining rates of revenue growthwill contribute to a very gradual improvement in debt leverage metrics for chemicals companies in2019 and beyond.
• Debt to EBITDA will strengthen in 2019 from a global perspective, but this primarily reflects astrengthening in North America and Europe. This is partly because we do not generally forecastlarge or transformative M&A due to the unpredictability of such transactions.
• We expect that debt to EBITDA for Asia-Pacific will increase in 2019 versus 2018, partly reflectinghigh levels of capital spending in this region.
2015 2016 2017 2018 2019 2020
Forecast
2015 2016 2017 2018 2019 2020
Forecast
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Trend #2: Growth Strategy And Financial Policy Are Key
• We assume that chemicals companies will adjust key elements of their financial policies such asdividends and shareholder rewards to economic conditions. This is relevant because 2018 saw record-high dividend payouts and operating cash flow in the global chemicals sector.
• This cash flow, favorable operating conditions, and a decline in M&A spending offset the credit riskrelated to the dividend payout increase.
• We would view a similar amount of dividend payouts in a more challenging operating environment as areflection of a more aggressive financial policy than we currently factor in our ratings, and therefore asa credit risk.
• We do not assume record-high dividend payouts for the sector in 2019 if M&A picks up or operatingcash flow weakens.
2007 2009 2011 2013 2015 2017
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Trend #3: Growth By Selective Bolt-On M&A To Continue
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4.2
0%
5%
10%
15%
20%
25%
0
20
40
60
80
100
2006 2008 2010 2012 2014 2016 2018
€, bn
Chem sector M&A deals - EU31 (lhs)EU31 Chem Sector Deals - % of Total EU31 M&A volumes (rhs)
3
0%
1%
2%
3%
4%
5%
0
5
10
15
20
25
2006 2008 2010 2012 2014 2016 2018
EU Chem M&A deal count (lhs)EU Chem sector deal count - % of Total EU M&A deal count (rhs)
23%
50%33%
31%
25%
33%
46%67% 67%
25%
2016 2017 2018 2019 YTD
RoW
North America
APAC
Europe
Source: Capital IQ, with YTD as of April 30, 2019. European target include transactions announced
with an EV above USD100 million.
• 3 deals involving a European target to April 30, 2019, as issuershad already been very active in 2016 and 2018.
• European chemical assets remain principally the target ofNorth American buyers.
• We assume that targeted bolt-ons will continue to supportgrowth and diversification.
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S&P guidance for current rating level (minimum ratio that needs to be maintained)S&P forecast (2019)
12%
Akzo Nobel
L’Air Liquide
Arkema
BASF
Clariant
DSM
Evonik
SIKA
Lanxess
Linde
Solvay
Syngenta
FFO-to-Debt 2019 (S&P Projections)
60% 45% 30% 20%
INEOS Group4.0x
Debt-to-EBITDA 2019 (S&P Projections)
0.0x 1.5x 2.0x 3.0x 5.0x
Minimal Modest Intermediate Significant Aggressive
Moderate Headroom For Many Issuers, With Few Exceptions
Israel Chemicals
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Outlook On The Fertilizer Industry
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Commodity Prices & Futures
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• Falling inventories and gradually improving grainprices, albeit from a low level, should providesupport to farm economics and demand forfertilizers.
• Commodity prices to remain dependent onweather patterns, climate changes, availability ofland and the efficiency of its use, inventory levels,and growing population and demand for meat.
60%
70%
80%
90%
100%
110%
120%
130%
17-ינו 17-יול 18-ינו 18-יול 19-ינו 19-יול 20-ינו 20-יול 21-ינו 21-יול
Corn Soya Bean Wheat
0
200
400
600
800
1,000
1,200
17-מאי 17-נוב 18-מאי 18-נוב 19-מאי 19-נוב 20-מאי 20-נוב
Corn Soya Bean Wheat
USD
Source: Bloomberg; Chicago Board of Trade (CBOT). Grain prices indexed to Jan 2017.
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• The estimated 2018 world cereal production is down by 1.8%,largely on account of lower maize and wheat outputs, thatmore than offset the increase in rice.
• Utilization, however, is estimated to increase by 1.1% from2017 level. The bulk of this growth stems from rising food useand strong demand in Asia.
• This implies higher utilization of world cereal stocks during theyear. The estimated global cereal stock-to-use ratio is downfrom a relatively high level of 32.6% in 2017 to 30.7% in 2018.
• Aggregate production of oilseeds grew by 3% in 2018, highersoybean and sunflowers production more than offsetdecreases for peanut and rapeseed productions during theyear.
• Soybean production recovered post a decline in 2017, growingby 6.2% in 2018. US soybean stocks are estimated to behistorically high, pressuring prices. 25% tariff on soybeansexported from the US to China (in effect in July 2018) nothelping.
• Global oilseeds stocks are up slightly on the back of highercarryover from Brazil soybean stocks.
Current Market Conditions: Cereal And Oilseeds
Source: Bloomberg.
0
100
200
300
400
500
World Rice Thailand World Maize (Corn) FOB Gulf Mexico
World Wheat FOB Gulf Mexico
USD
0
200
400
600
800
1000
World Soybeans US Chicago
World Palm Oil Malaysia
World Rapeseed Oil Crude FOB Rotterdam
USD
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Outlook On Potash
• Risk of overcapacity in the market as Eurochem and K+S ramp up production. Key market players cautious of supply / demand equilibrium choosing price over volume strategy, but risks remain given concentrated market.
• 2019 potash demand growth forecast by IFA at 1.8% vs. supply of 4.7%.• In December 2018, Urakali confirmed that it plans to divert potash sales away from China and India due to
low benchmark prices. The company signed only small volume contracts in China at US$290/tonne CFR benchmark with no contract has been signed in India.
• Consumption of potash more cyclical in comparison with nitrogen or phosphate.• Current prices at $290/tonne CFR (India), vs. $240/tonne the year before.
100
200
300
400
500
16-ספט 17-ספט 18-ספט
Potash China CFR Potash Brazil CFR Potash Cornbelt granular Potash US Gulf NOLAPotash Vancouver granular Potash India CFR Potash Saskatchewan granular
USD/Mt
Source: Bloomberg.
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• Capacity additions (Ma’aden, OCP) offset by closures (Plant city, Nutrien’s Redwater in Canada). • Continued consumption growth in India, US, and Brazil will support prices, but limited recovery amid high
inventory levels, at least in the first half of 2019. • Raw material prices to remain supportive due to capacity additions (ammonia, sulphur).• Wild card: possible decline in exports from China due to environmental regulations (disposal of gypsum to
Yangtze River) could add to operating costs / capex of local producers and disrupt local supply. • Current prices at $415/tonne (DAP Morocco), vs. $430/tonne the year before. • 2019 phosphoric acid demand growth forecast by IFA at 1.7% vs. supply of 1.2%.
Outlook On PhosphateUSD/Mt
0
100
200
300
400
500
600
16-ספט 17-ספט 18-ספט
DAP US Gulf NOLA DAP Cornbelt
DAP Baltic DAP Benelux FCA
DAP Marroco
0
100
200
300
400
500
600
700
16-ספט 17-ספט 18-ספט
MAP US Gulf NOLA MAP Brazil Bulk CFR
MAP Cornbelt MAP Eastern Canada
Source: Bloomberg. MAP = Monoammonium Phosphate (46% phosphate and 11% nitrogen); DAP = Diammonium Phosphate (46% phosphate and 18% nitrogen)
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• Several capacity additions outpacing demand over the course of 2016-2018. • Supply below 2%-3% consumption growth expectations from 2019 onwards. Additions in India, Iran
less certain, too. • Environmental policies resulting in capacity reductions and lower exports from China clearly positive
for prices, but volumes and prices negatively affected by a delay to planting season in Q1 2019. • In 2018, margins of European nitrogen producers under pressure due to higher gas prices more than
offsetting modest rebound in selling prices. So far in 2019, margin pressure easing thanks to excess LNG supply. Structural disadvantage to remain.
• Current prices at $200/tonne (US Gulf Nola), vs. $232/tonne the year before. • 2019 nitrogen demand growth forecast by IFA at 1.2% vs. supply of 1%.
Outlook On NitrogenUSD/Mt
0
100
200
300
400
500
600
16-ספט 17-פבר 17-יול 17-דצמ 18-מאי 18-אוק 19-מרץ
Ammonia Tampa Ammonia US Gulf NOLA
Ammonia Black Sea Ammonia Cornbelt
Ammonia Western Europe CFR0
100
200
300
400
500
16-ספט 17-מרץ 17-ספט 18-מרץ 18-ספט 19-מרץ
Urea Cornbelt granular Urea China granularUrea India granular Urea US Gulf prillUrea Middle East prill Urea Black Sea prill
Source: Bloomberg.
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Global Polyolefin Outlook
21
Ethylene and Propylene
23
Ethylene and propylene will see a “cost push” due
to IMO 2020 related naphtha feedstock cost
pressures.
350
550
750
950
1150
1350
1550
2014 2016 2018 2020 2022 2024 2026 2028
$/mtGlobal Ethylene Price
Forecasts
US Asia Europe
600
800
1000
1200
1400
2015 2017 2019 2021 2023 2025 2027 2029
$/mt Global Propylene Price Forecasts
US Asia Europe
Source: S&P Global Platts Analytics
• Tighter gasoline due to refinery yield shift implies more reforming and a battle for aromatics (gasoline blending versus BTX petrochemicals)
• Higher naphtha prices implies steam cracker feed preference shift to max LPG/ethane which further reduces ethylene co product aromatics supply
• Lower severity FCC (max distillate mode) combined with lighter steam cracker feeds implies reduced refinery grade propylene (RGP) and increased
incentive for PDH propylene supply
• Higher freight rates will lower chemical & polymer export netbacks
24
There will be a cash cost increase in 2020 for
naphtha-based ethylene producers due to IMO,
with NGL-based regions seeing minimal
movement.
Source: S&P Global Platts Analytics
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
- 50 100 150 200 250
$/mt
Cumulative Capacity (million mt/year)
Ethylene Production Cost Curves
2014
2018
2020
2023
2029
Saudi
Ethane
US
Ethane
NWE
Naphtha
SE Asia
NaphthaNE Asia
Naphtha
25
0
2
4
6
8
10
12
2016 2018 2020 2022 2024 2026 2028
Million mt
Global Marginal Ethylene Capacity Additions Including
Speculative
Middle East Europe AsiaAmericas Africa
42%
34%
6%
1%
4% 13%
Global Ethylene Capacity Additions by Feedstock
Ethane
Naphtha
Propane
Butane
Other
CTO/MTO
Ethylene capacity additions focused in strong
demand centers as well as low cost feedstock
regions.
Source: S&P Global Platts Analytics
26
Global ethylene demand growth will be driven
by polyethylene and fiber grade MEG for PET
demand.
Source: S&P Global Platts Analytics
63%11%
8%
5%
2%
11%
Ethylene Demand by Derivative - 2019
PE MEG EDC
SM VAM Others
66%11%
7%
5%
1%
10%
Ethylene Demand by Derivative - 2029
PE MEG EDC
SM VAM Others
27
Ethylene overcapacity in coming years leads to
lower prices and down cycle before a sustained
recovery starts from 2024.
87%
88%
89%
90%
0
2
4
6
8
10
2015 2017 2019 2021 2023 2025 2027 2029
Million mt
Incremental Ethylene Capacity, Production and Demand
Changes
Capacity Production
Demand Utilization rate (%)
350
550
750
950
1150
1350
1550
2014 2016 2018 2020 2022 2024 2026 2028
$/mtGlobal Ethylene Price
Forecasts
US Asia Europe
Period of Bearish
Prices
The current US
disconnect to disappear
once export terminals
are built
Source: S&P Global Platts Analytics
28
Regional spot ethylene margins. Asia & Europe
experience margin compression while US prices
reach export parity after 2023.
Source: S&P Global Platts Analytics
$-
$100
$200
$300
$400
$500
$600
$700
$800
$900
$/mt
US Ethane Asia Naphtha Euro Naphtha
29
The increase in lighter cracking has led to the
emergence of more on-purpose propylene
production in Asia and the Americas dominated
by PDH, CTO and MTO.
-
20
40
60
80
100
120
140
160
2014 2017 2020 2023 2026 2029
Million mt
Global Propylene Production by Technology
Cracker FCC
PDH OCU & Others
0
20
40
60
80
100
120
140
160
180
2014 2017 2020 2023 2026 2029
Million mt
Propylene Capacity Led by Asia
Americas Middle East
Europe Asia
Africa
Source: S&P Global Platts Analytics
30
PDH operating rates to increase starting in 2H
2019 and 2020 utilizing cheaper propane. FCC
propylene supply will decrease during this period
as a result of IMO 2020 refinery yield shifts.
70%
75%
80%
85%
90%
95%
2014 2016 2018 2020 2022 2024 2026 2028
% Global PDH and FCC Propylene Operating Rates
FCC Propylene Operating rates
PDH Operating Rates
-
1
2
3
4
5
6
2016 2018 2020 2022 2024 2026 2028
Million mt
Capacity Additions By Technology
FCC PDH Cracker CTO MTO MTP
Source: S&P Global Platts Analytics
31
Global propylene demand growth driven by PP
and propylene oxide.
Source: S&P Global Platts Analytics
68%
5%
7%
7%
3% 1%4%
5%
Propylene Demand by Derivative - 2019
PP Cumene ACN
PO Acrylic Acid IPA
2-EH Others
70%4%
6%
7%
3% 1%4%
5%
Propylene Demand by Derivative - 2029
PP Cumene ACN
PO Acrylic Acid IPA
2-EH Others
32
Source: S&P Global Platts Analytics
Propylene market dynamics are tighter than ethylene but
new on-purpose capacity in coming years leads to lower
prices and mild down cycle before a sustained recovery
starts after 2023.
80%
85%
90%
0
1
2
3
4
5
6
7
2015 2017 2019 2021 2023 2025 2027 2029
Million mt
Incremental Propylene Capacity and Demand
Changes
Incremental Capacity Additions
YoY Demand Growth
Operating Rate (%)
600
700
800
900
1000
1100
1200
1300
2015 2017 2019 2021 2023 2025 2027 2029
$/mtGlobal Propylene Price
forecasts
US Asia Europe
Polyethylene and Polypropylene
34
Global virgin polyethylene demand growth
remains above GDP driven by strong Asian
petrochemical demand.
Source: S&P Global Platts Analytics
-
10
20
30
40
50
60
70
80
90
100
2014 2017 2020 2023 2026 2029
Million mt
Asia Ethylene Demand by Derivative
PE MEG EDC SM VAM Other
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
%
Global Polyethylene Demand Growth vs GDP Growth
Global GDP Growth
Global Virgin PE Demand Growth
35
0
1
2
3
4
5
6
7
8
9
10
0 5 10 15 20 25 30 35 40 45 50
Pro
jecte
d %
CA
GR
(2
01
8-2
02
9)
Polyethylene consumption (2018), kg per capita
Polyethylene Demand Per Capita (2018 – 2029)
China Europe South America India Asia (Excluding China and India) USA
PE demand in Asian economies continues to grow faster
than GDP growth as they strive to reach ‘Western’ per
capita demand levels along with increasing levels of
urbanization.
Source: S&P Global Platts Analytics
36
76%
78%
80%
82%
84%
86%
88%
90%
92%
0
1
2
3
4
5
6
7
8
9
2014 2016 2018 2020 2022 2024 2026 2028
Million mt
Global PE Incremental Capacity and Demand Growth
Incremental Capacity Additions YoY Demand Growth
Utilization Rate (with spec cap) Utilization Rate (w/o spec cap)
Polyethylene overcapacity will lead to lower utilization and
down cycle through 2023, with a recovery post 2024.
Investment will be needed from 2024 to keep operating
rates within historical norms.
Source: S&P Global Platts Analytics
37
Overall, Middle East and the US will be key
polyethylene exporters.
-40
-30
-20
-10
0
10
20
30
40
2013 2015 2017 2019 2021 2023 2025 2027 2029
Million mt Regional PE Net Trade
Africa Asia
Middle East Eastern Europe
Western Europe Central and South America
North America
• Shale based ethane expansions
in the US will result in its
emergence as a hub of HDPE
and LLDPE exports alongside the
Middle East
• Asia, in particular China will
continue to grow as the main
importing region due to strong
demand growth, despite capacity
additions
• The Middle East will continue to
dominate exports to Asia, Africa
and Europe
• However, the US will have to
compete with the Middle East for
exports into Asia and Europe
• Current uncertainty remains due
to China-US trade war and 25%
import tariffs for HDPE & LLDPE
Source: S&P Global Platts Analytics
38
Regional spot HDPE integrated margins. All
regions experience margin compression into 2023
and Asia remains the high cost region.
Source: S&P Global Platts Analytics
$300
$400
$500
$600
$700
$800
$900
$1,000
$1,100
$1,200
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
$/mt
US Ethane Asia Naphtha Euro Naphtha
39
86%
87%
88%
89%
90%
91%
0
20
40
60
80
100
120
2013 2016 2019 2022 2025 2028
Million mt
Global PP Outlook
ProductionCapacityDemandO/R (with spec cap)
86%
87%
88%
89%
90%
91%
0
1
2
3
4
5
2014 2017 2020 2023 2026 2029
Million mt
Global PP Incremental Capacity and Demand Growth
Incremental Capacity Additions
YoY Demand Growth
Utilization Rate (%)
Global PP capacity not as overbuilt as PE allowing for
higher run rates and better margins. PP op rates to quickly
improve post 2023.
Source: S&P Global Platts Analytics
40
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
2015 2017 2019 2021 2023 2025 2027 2029
$/mtGlobal PP Price Forecasts
Asia Europe US
Period of Bearish
Prices
Global PP prices and margins to follow same cycle as
PE, showing improvements from 2023 onwards. PP
fundamentals are more constructive than PE but both
will experience volatility.
Source: S&P Global Platts Analytics
$300
$400
$500
$600
$700
$800
$900
$1,000
$/mt
Regional PDH integrated PP margins
US Asia Euro
• Regional PDH integrated polypropylene margins. Asia will
have increasing margins as new PP capacity is absorbed and
international propane prices remain depressed.
41
-15
-10
-5
0
5
10
15
2013 2015 2017 2019 2021 2023 2025 2027 2029
Million mt Regional PP Net Trade
Asia Middle East
Africa Eastern Europe
Western Europe Central and South America
Asia will continue to dominate PP imports with North
America transitioning to a net exporter through the
outlook as the integrated PDH/PP projects are built out.
• Asia to lead the way in terms
of import requirements
despite Chinese PDH/PP
capacity additions
• The Middle East will
maintain its position as the
key global PP exporter
• Capacity additions in the
USGC & Canada will see
North America emerge as a
growing export region with
PP flowing mainly South
America & Asia
Source: S&P Global Platts Analytics
Recycling Trends
43
Virgin PET bottle demand growth will continue
but a greater percentage of the total PET bottle
supply will become RPET.
-
5
10
15
20
25
30
35
40
45
2012 2015 2018 2021 2024 2027
Millio
ns m
t
Global PET Bottle Demand
RPET Bottles
Virgin PET Bottle Demand
0%
5%
10%
15%
20%
25%
2012 2015 2018 2021 2024 2027
RPET Percent in PET Bottles
Source: S&P Global Platts Analytics
44
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
BP
D
Feedstock displaced from recycling
PET
PP
PE
Our base case for increasing plastics recycling
from current level of 7% to 12% of demand
reduces feedstock usage by 650,000 bpd.
*assumes that PE is made from ethane and that PP is produced via propane
dehydrogenation
0
5
10
15
20
25
30
35
40
45
50
2019 2024 2029
Mil
lio
ns m
t
Global recycled PE, PP and PET
PE PP PET
45
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
%Global Polyethylene Demand Growth vs GDP Growth
Recycled % of Total Global PE Demand Growth
Global Virgin PE Demand Growth
Global GDP Growth
Recycled PE demand/supply will eat into Virgin
PE demand growth
Source: S&P Global Platts Analytics
46
Key Takeaways
• IMO 2020 expected to increase naphtha prices which will pressure ethylene margins, reduce refinery propylene
supply
• New ethylene capacity will focus on ethane and naphtha feedstocks
• Global ethylene & PE margins will be under pressure as additional capacity comes on line over next few years
and ethylene demand will be driven by PE expansions
• Global propylene & PP margins will also decrease but not as much as ethylene & PE due to less oversupply.
Propylene demand driven by PP expansions
• Global virgin PE demand growth remains above GDP driven by strong Asian petrochemical demand led by
China and India
• Global PE overcapacity will lead to lower utilization and down cycle through 2023, with recovery post 2024
• The US will increase exports of HDPE & LLDPE both of which still have 25% Chinese import tariffs
• Global PP fundamentals are stronger than PE and therefore margins are more stable but will still be under
pressure over the next 3-4 years
• Asian integrated PDH to PP margins will improve as PDH/PP expansions are absorbed and propane remains
cheap
• Recent PP trade dominated by ME exports and Asian imports, other regions have been balanced
• North America to change from balanced to net long PP over next 5-10 years as new PDH/PP facilities start up
in the USGC and Canada
• PET is the most mature recycling market and has the best transparency. Polyethylene and polypropylene are
expected to follow recycled PET bottles market lead. Other plastics including PVC and polystyrene have their
unique recycling challenges.
• Platts Analytics forecasts virgin CAGR growth rates for major plastics to average 3.2% over the next decade
while recycling CAGR is expected to average 8.3%
• Platts Analytics forecast that the amount of recycled PE, PP and PET will double over the next decade and
displace 650,000 bpd of polymer feedstocks. Longer term, mixed plastics wastes to fuels technologies could
replace an additional 750,000 bpd of oil demand.
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ESG In Credit Ratings
47
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ESG & Credit - Look Back Series
48
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ESG Factors In Our Rating Methodology
49
Credit FAQ: How Does S&P Global Ratings Incorporate
Environmental, Social, And Governance Risks Into Its
Ratings Analysis, Nov 21, 2017
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ESG Factors In Our Rating Methodology
50
Switzerland-headquartered Sika: In 2018, Sika invested about CHF14.3 million on environmental protection,health, and safety. This accounted for about 6% of the CHF239 million in total investment. Sika also reachedthe objective of reducing its energy consumption by 3% per ton sold, which in 2018 amounted to 424megajules (2017: 450 megajules). The reduction was achieved through a strategy to improve the energyefficiency of production plants, which we view as positive because it translates into better profits for thecompany.
Cellulose acetate tow producer Acetow: Our view on Acetow and the tow industry takes into account environmental and social considerations in particular. We recognize the social impact and public health concerns surrounding cigarette consumption and by extension the tow operating model, and we consider that public policy making in order to limit the social cost of smoking population could have an adverse impact on tow manufacturing and marketing over the long term. (…) Our analysis also focuses on the very low biodegradability of standard acetate tow products, and concerns regarding induced pollution and littering. A standard tow product could take as long as 12 years to degrade in the natural environment. We believe, on the back of environmental policy making, this could result in more stringent regulations and the need for the industry to develop more environment-friendly tow products, possibly with deviating cost-of-manufacturing, and recycling capabilities or clean-up initiatives in which cigarette manufacturing players
could play a large role.
German Potash Producer K+S : In the first quarter of 2017, prolonged low water levels in the Werra river ledto a 25-day outage, but thanks to waste disposal measures implemented by the company, no furtherproduction days were lost in the second quarter. We believe that the production limitations in Germanyshould significantly reduce in the second half of 2017, but uncertainty remains as capacity utilizationcontinues to depend on the Werra River's water levels.
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Transparency in Corporate Credit Reports
51
As with peers, Syngenta can be subject to lawsuits, personal injury complaints, andchanging views of crop protection products on human health and the environment.We note that Syngenta is focused on mitigating the risks in relation to its products,notably through extensive research on their safety, collaboration with the authoritiesthrough provision of data on the impact on human health and the environment, andinternal audits and self-reporting processes to ensure compliance with strict andextensive regulatory standards. The company also supports growers in understandingthe correct use and application of its products via clear labels and marketcommunication.
Still, in late 2017, Syngenta reached a $1.5 billion settlement in relation tocommercialization of Viptera and Duracade insecticides. Litigation payments of suchmagnitude can have an important impact on the company's finances, reputation, andultimately the rating.
We view governance as a neutral factor for the ratings, reflecting management's longstanding experience and expertise in the industry, balanced by our view of certainlimitations with regard to transparency and timeliness of communications withinvestors.
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Questions?
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Company Focus: Selected Issuers
53
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YaraInternational,
Lanxess
0
1
2
3
4
5
6
7
01234567
ExcellentStrongFairWeakVulnerable Satisfactory
Highly Leveraged
Aggressive
Significant
Intermediate
Modest
Minimal
DSM
BASF, Evonik Industries
Israel Chemical
OCI
Akzo Nobel
Ineos Group Holding
Solvay,
Syngenta
L’Air Liquide
Linde Plc
Fin
anci
alR
isk
Pro
file
Business Risk Profile
54
• Israel Chemical (BBB-/Stable)
• Linde Plc (A/Stable/A-1)
• BASF (A/Stable/A-1)
• Akzo Nobel (BBB+/Stable/A-2)
• DSM (A-/Stable/A-2)
• L’Air Liquide (A-/Stable/A-2)
• Evonik Industries (BBB+/Stable/A-2)
• Solvay S.A. (BBB/Stable/A-2)
• Yara International (BBB/Stable/A-2)
• LANXESS (BBB/Stable/A-2)
• Syngenta (BBB-/Stable/A-3)
• Ineos Group Holdings (BB/Stable)
• OCI N.V. (BB-/Stable)
• Oxea (B+/Stable)
Oxea
Portfolio Credits Overview – EMEA Chemicals
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Company Focus: Israel Chemical (BBB-/Stable)Key Strengths Key Risks
• One of the leading global potash producers and the largestglobal bromine producer
• Competitive advantage from mining in the Dead Sea,which provides access to unique, high-quality rawmaterials; logistical advantages; proximity to ports; and amore favorable cost position for potash and bromine thanpeers.
• A synergy between the manufacturing processes fordifferent specialty chemicals products that provide addedvalue.
• Cyclical and competitive nature of the fertilizer industry.
• Exposure to regulatory changes and political pressure inIsrael pertaining to extending the Dead Sea miningconcession, which is valid until 2030.
Stable Outlook
The stable outlook on Israel Chemicals Ltd. (ICL) reflects our expectation that ICL will maintain S&P Global Ratings-adjusted debt toEBITDA of 3.0x-3.5x in the slowly recovering fertilizer pricing environment. Our expectation is based on the company's plan toundertake midsize mergers and acquisitions (M&A) in the coming years and maintain its current dividend policy.
We anticipate that ICL will generate EBITDA of about $950 million-$1 billion in 2018, benefiting from a strong position in thefertilizer markets and low production costs in Israel. We consider an adjusted debt-to-EBITDA ratio of 3.0x at the top of thebusiness cycle and 4.0x at the bottom of the cycle to be commensurate with the current rating. We also expect the company togenerate positive free cash flows over time.
Downside scenarioWe would consider a negative rating action if the company's debt to EBITDA was close to 4.0x without near-term prospects ofrecovery, and its operating performance deteriorated, contrary to our expectations. In our view, this scenario is possible if ICLimplements aggressive business or financial policies, whether by significantly deviating from its publicly stated dividend policy orthrough sizable leveraged acquisitions. Further deterioration in market conditions that may hurt operating results could also leadto a downgrade. In the medium term, the rating could come under pressure if uncertainty regarding the renewal of the Dead Seaconcession continues. In this scenario, we expect pressure on the company's business risk profile, which currently benefits from itsinherent advantages in the Dead Sea.
Upside scenarioWe would consider a positive rating action if ICL strengthened its financial risk profile such that its adjusted debt to EBITDAdropped below 2.5x on a sustainable basis.
55
Business Risk
Satisfactory
Financial Risk
Significant
Anchor
bbb-
Outlook
Stable
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Company Focus: Linde Plc (A/Stable/A-1)Key Strengths Key Risks
• One of the largest global manufacturers in the credit-supportive industrial gases industry.
• Strong geographic diversity, with significant exposure to high-growth markets.
• High and stable profit generation.
• Track record of strong credit metrics and conservative financial policy, targeting less than 2.5x reported net debt to EBITDA.
• Potential volatility in earnings driven by demand swings in its cylinder and bulk businesses.
• High capital expenditures (capex), potentially weighing on free cash flows.
Stable Outlook
The stable outlook reflects our view of the combined entity's resilient business and its commitment to balance growth investmentsand shareholder returns with credit metrics commensurate with our 'A' rating, including FFO to debt of at least 30% on average.We note the combined entity's increased profitability and estimate substantial FOCF generation of $3.0 billion-$3.5 billion peryear. This results in meaningful headroom under the rating in 2019-2020 given our forecast of adjusted FFO to debt at the higherend of the 35%-40% range.
Downside scenarioWe could lower the rating if the group adopts a more aggressive or more shareholder-friendly financial policy, leading to increased leverage. Specifically, we would consider a downgrade if adjusted FFO to debt falls below 30% without prospects of a rebound, or the company's announcement to allow this to occur.
Upside scenarioA positive rating action is unlikely at this stage, given the current financial policy and management's commitment to an 'A' rating. However, we could consider an upgrade if adjusted FFO to debt remained sustainably above 35% and management committed to maintaining it at this level.
56
Business Risk
Excellent
Financial Risk
Intermediate
Anchor
a+
Modifier
Financial policy : Negative (-1 notch)
Outlook
Stable
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Company Focus: BASF (A/Stable/A-1)Key Strengths Key Risks
• The world's leading integrated chemicals producer, with anexpanding presence in Asia and North America.
• "Verbund" integrated strategy that offers cost savingsthrough logistics, energy, and infrastructure advantages.
• Diversification benefits of producing commodity andspecialty chemicals, complemented by a significant shareof agrochemicals.
• Solid profitability and high free cash flow generation.
• Moderate financial debt.
• Cyclicality of the chemicals industry, notably of the commodity chemicals segments, with its significant exposure to the automotive sector
• High post-retirement obligations.
• Historically high shareholder payouts, which have reduced financial flexibility.
Stable Outlook
The stable outlook reflects our view of BASF's diversity and resilience. Its business comprises a substantial share of less volatilespecialty chemicals, which should enable it to maintain FFO to debt around 35% over the next couple of years, balancing itsexposure to more cyclical end-markets such as the automotive sector. We believe that the company's leeway for bolt-onacquisitions at the current rating level is reduced though following the recent series of acquisitions and due to potential slowerGDP growth in North America and Europe, increased environmental concerns and softening demand in key end markets such asthe automotive industry.
Downside scenarioWe could downgrade BASF if it made a significant debt-financed acquisition, or there was a major global slowdown leading tomaterially lower demand across the chemical industry. In particular, we would lower the rating if FFO to debt declined below 35%on a prolonged basis.
Upside scenarioWe could raise the rating if the company improves its adjusted FFO-to-debt ratio sustainably above 45% as a result of strongerEBITDA generation and better free operating cash flow (FOCF). This would likely hinge on a much stronger global macroeconomicenvironment than we currently expect and an improved supply-demand balance in commodity chemicals.
57
Business Risk
Strong
Financial Risk
Intermediate
Anchor
a-
Modifier
CRA: Positive(+1 Notch)
Outlook
Stable
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Company Focus: Akzo Nobel (BBB+/Stable/A-2)Key Strengths Key Risks
• A leading global producer of decorative paints and coatings.
• Strong brand recognition and solid long-lasting relationships with clients.
• Sizable, well-diversified operations by country and market including in higher-growth emerging and Asian markets.
• Healthy balance sheet, strong liquidity, and ample rating headroom.
• Track record of prudent risk management and low leverage, given no adjusted debt at present.
• Lower profitability than main competitors and reduced size and scope following the sale of the higher-margin specialty chemicals business.
• Demand for key products mirrors GDP trends, partly offset by exposure to the renovation market in the decorative paints segment.
• Potential for margin squeeze from raw materials costs and pricing constraints from end markets.
• Top and bottom line results exposed to foreign exchange volatility, especially in high-inflation regions.
Stable Outlook
The stable outlook reflects our view that Akzo's focus on operating efficiencies and cost pass-through will support the growth in itsadjusted EBITDA to about €1.3 billion-€1.4 billion in 2019, up from about €1.2 billion in 2018. We consider a ratio of funds fromoperations (FFO) to debt of about 45%-60% as commensurate with the 'BBB+' rating.
Downside scenarioWe see a downgrade as unlikely, reflecting generous headroom in the rating. However, we could lower the rating if Akzo's growthstrategy results in sizable, debt-financed acquisitions, even though we would weigh such a transaction against the correspondingbenefits to the business.Higher-than-anticipated dividends, share buybacks, or a marked deterioration in the operating performance resulting in asustained FFO to debt ratio below 45% could also lead to a negative rating action.
Upside scenarioWe could raise the rating on Akzo if its financial policy supported a higher rating, notably through the commitment to prudentoutlays for acquisitions and shareholder remunerations, and adherence to an adjusted FFO-to-debt ratio of at least 60%. A revisionof our assessment of Akzo's business, for example if it were to clearly and sustainably narrow the profitability gap with peers, couldalso lead to a positive rating action.
58
Business Risk
Satisfactory
Financial Risk
Minimal
Anchor
a
Modifier
Financial Policy: Negative (-2 Notch)
Outlook
Stable
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Company Focus: DSM (A-/Stable/A-2)Key Strengths Key Risks
• Leading market positions in a wide range of nutritional products including vitamins, carotenoids, lipids, and feed enzymes.
• Broad product, end-market, and geographic diversity.
• Robust R&D and technological capabilities.
• Strong free operating cash flow generation .
• Exceptional liquidity and considerable headroom under the current rating.
• Potentially material fluctuations in EBITDA generated by its polyamide-based engineering plastics and high-performance resins business.
• Competition from Chinese producers of vitamins (notably vitamins E and C).
• Sizable cash outlays to cover shareholder remuneration and share buybacks.
• Lack of management’s commitment towards maintaining financial policy commensurate with a higher rating.
Stable Outlook
The stable outlook reflects our view that Dutch chemicals company Koninklijke DSM N.V. (DSM) will report resilient operatingperformance in the coming years, benefiting from a focus on cost efficiencies, working capital management, and innovation.We consider a ratio of S&P Global Ratings-adjusted funds from operations (FFO) to debt of about 35%-40% as commensuratewith the 'A-' rating and believe that the company has considerable rating headroom.
Downside scenarioWe see the likelihood of a downgrade as low, reflecting strong headroom in the rating. However, we could lower the rating ifDSM's FFO to debt declined below 35%, for example if DSM's nutrition segment margins weakened as a result of increasedcompetition, or if the benefits of the operational efficiency program were not sustainable. Similarly, a weaker financial policycommitment, demonstrated, for example, by a combination of higher-than-anticipated acquisitions, dividends, or sharebuybacks, could also prompt a negative rating action.
Upside scenarioWe could raise the rating on DSM provided that we were confident that the company could sustain an adjusted FFO-to-debt ratio of above 45%--a level that we view as commensurate with an 'A' rating. We would take this action if we were confident that DSM would maintain an appropriate balance between potential acquisitions, dividends, and share buybacks, such that the FFO-to-debt ratio was maintained, and if management committed to higher credit metrics.
59
Business Risk
Strong
Financial Risk
Modest
Anchor
A
Modifier
Financial Policy: Negative (-1 notch)
Outlook
Stable
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Company Focus: L’Air Liquide (A-/Stable/A-2)Key Strengths Key Risks
• Leading global player in the industrial gases sector with supportive market fundamentals and favorable growth prospects.
• Superior resilience of activity and profitability, benefiting from long-term contracts, off-take volumes, and energy pass-through clauses.
• High profitability, with EBITDA margins of 25%-26%, and a track record of achieving efficiency targets and realizing synergies.
• Prudent and disciplined financial policy, strongly committed to the 'A' category.
• An acquisitive track record including continued bolt-ons and potential larger acquisitions translating into temporary leverage increases.
• Fairly high capital expenditures, including for significant growth projects, notably in Asia and emerging markets
• A shareholder-friendly, but very stable, dividend policy.
• Marginal variability in top-line growth linked to regional macroeconomic changes, modest cyclicality of some markets, and currency exposures.
Stable Outlook
The stable outlook on France-based industrial gas supplier L'Air Liquide S.A. reflects S&P Global Ratings‘ expectation that thecompany will report overall resilient performance and strong free operating cash flow generation that should allow FFO to debt toremain at about 25% in 2018 and exceed that level in 2019. This assumes Airgas synergies staying well on track, and sustainedactivity supported by a high level of industrial production, despite marginal currency exposure. We also acknowledgemanagement's disciplined financial policy and commitment to maintain a rating level of at least 'A-'.
Downside scenarioWe could raise the rating if market growth and operating margins stay resilient, such that FFO to debt approaches 30% on asustainable basis, and management remains committed to balancing investments and shareholder returns to maintain that ratiolevel.
Upside scenarioAlthough unlikely in the near term, given the current comfortable rating headroom, we could lower the rating if weaker operatingperformance or further mergers and acquisitions kept the FFO-to-debt ratios significantly below 25% for a prolonged period.
60
Business Risk
Excellent
Financial Risk
Significant
Anchor
a-
Outlook
Stable
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Company Focus: Evonik Industries (BBB+/Stable/A-2)Key Strengths Key Risks
• Stronger-than-peers' end-market diversification, with a high share of sales from the nutrition and health care industry, as well as resource-efficient solutions.
• Average but resilient profitability overall, with potential improvement over the medium term thanks to cost saving initiatives.
• Our expectation of ongoing positive free cash flow generation based on moderate capex and working capital.
• Supportive financial policy and management's commitment to a solid investment-grade rating, most recently demonstrated by issuance of a hybrid to support an acquisition.
• Strong liquidity.
• Some concentration risk in the product portfolio that could lead to more-volatile profit generation, notwithstanding strategy to further increase the share of specialty chemical products.
• Cyclicality of chemical activities and exposure to• volatile raw material prices.• Significant postretirement obligations.
Stable Outlook
S&P Global Ratings' stable outlook on global specialty chemicals group Evonik Industries (Evonik) reflects our expectation that the group will generate solid adjusted EBITDA of about €2.6 billion in 2018 and at least €2.6 billion-€2.7 billion in 2019. We also factor in Evonik's financial policy commitment to a solid investment-grade rating and anticipate that dividends and acquisitions (if any) will be financed prudently. We view a ratio of adjusted funds from operations (FFO) to debt of 30%-40% as commensurate with the rating.
Downside scenarioWe could lower the ratings if we anticipated that S&P Global Ratings' adjusted FFO to debt would decline below 30% without near-term prospects of recovery. This could be caused, in our view, by a significant drop in profits due to a weaker market environment, or if Evonik pursued material debt-funded acquisitions.
Upside scenarioUpside rating potential could emerge over time, depending on Evonik's ongoing resilient performance thanks to a higher share of specialty chemicals in the product portfolio, visible EBITDA contributions from acquisitions and expansion projects, and a financial track record of adjusted FFO to debt in the 40%-45% range, including increased free cash flow after dividends. Financial policy commitment to a higher rating would be important in any upgrade considerations.
61
Business Risk
Strong
Financial Risk
Intermediate
Anchor
bbb+
Outlook
Stable
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Company Focus: Solvay S.A. (BBB/Stable/A-2)Key Strengths Key Risks
• Top-tier market positions for products representing 90% ofSolvay's revenue.
• Favorable portfolio repositioning after strategicacquisitions and the divestments of noncore businesses.
• Strong liquidity and a supportive debt amortization profile.
• Exposure to GDP swings and various cyclical end markets,such as construction and automobile.
• Relatively high sensitivity of pension deficits to discountrates.
Stable Outlook
The stable outlook reflects our view that Solvay's funds from operations (FFO) to debt ratio will exceed 25% in 2019, the level weview as commensurate with the current 'BBB' rating. We also forecast that Solvay will generate adjusted free operating cash flow(FOCF) of €400 million to €500 million in 2019 and factor in the sale of its integrated polyamides business for cash proceeds of €1.1billion by year-end. We expect the company's FFO to debt will strengthen, reaching 30% in 2019 and more than 30% in 2020.
Downside scenario
A deterioration of adjusted FFO to debt significantly below 25% without the prospect of an immediate recovery could put pressure
on the rating.
Upside scenario
We could raise our rating on Solvay to 'BBB+' if its ratio of adjusted FFO to debt sustainably improves above 30%. The rating upsidewould also depend on the company's financial policy and management's commitment to maintain this higher ratio.
62
Business Risk
Strong
Financial Risk
Significant
Anchor
bbb
Outlook
Stable
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Company Focus: Yara International (BBB/Stable/A-2)Key Strengths Key Risks
• World's largest distributor of fertilizer by volume, with good geographic diversity.
• Joint ventures in low-cost gas areas and large-scale efficient production facilities.
• Higher-margin specialty fertilizers that are a large contributor to profits.
• Profits anchored in the highly cyclical nitrogen fertilizer industry.
• Exposure to volatile--and currently increasing--European gas prices.
• Cash flow swings reflecting cyclicality of the fertilizer industry.
• Capital intensity and long lead time to add or expand capacity.
Stable Outlook
The stable outlook on Yara reflects our view that it will maintain adjusted FFO to debt of about 30%-45% through the cycle, whichwe view as commensurate with the rating. This is based on our assumption that, in 2019, Yara's adjusted EBITDA will recover to$2.1 billion-$2.2 billion, benefiting from its improvement program; additional volumes from capacity expansions and acquisitions;and recovery in prices of fertilizers from the bottom of the cycle conditions seen in 2016-2017.
Downside scenarioWe could lower the rating if Yara's adjusted FFO-to-debt ratio declined below 30%. This could occur, in our view, if Yara's marginsdeclined as a result of further pressure from the European natural gas prices, or if the company increased its capital expenditure(capex), acquisitions, or shareholder distributions.
Upside scenarioOver time, upside potential could emerge and would depend on our confidence that Yara was able to sustain adjusted FFO to debtof more than 45% through the cycle, and that the company's financial policy and growth strategy would support a higher rating.
63
Business Risk
Satisfactory
Financial Risk
Intermediate
Anchor
bbb
Outlook
Stable
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Company Focus: LANXESS (BBB/Stable/A-2)Key Strengths Key Risks
• Portfolio realignment (including exiting commodity chemicals) expected to result in higher, less volatile margins.
• Solid market position among the top three players in niche and midsize specialty chemicals business.
• Well-diversified exposure by geography and end markets, with six key end markets accounting for 75% of revenues.
• Improving leverage metrics in 2018-2019 following disposal of the 50% stake in ARLANXEO for €1.4 billion.
• Public commitment to maintaining a solid investment-grade rating.
• Debt-funded acquisitions related to the business-portfolio realignment strategy.
• Operating margins are improving, but still lag investment-grade specialty chemical peers' 17% average.
• Exposure to some cyclical end markets and volatile raw material prices.
Stable Outlook
The stable outlook reflects our expectation that, following the disposal of ARLANXEO, LANXESS will keep its FFO-to-debt ratiocomfortably above 30%, which we consider commensurate with a 'BBB' rating.In our base-case scenario for the rating, we assume that FFO to debt will be around 40% in 2018 and above 45% in 2019, indicatingsome headroom to absorb moderate business underperformance, higher capex, or small debt-financed acquisitions. We alsoexpect the adjusted EBITDA margin will improve by up to 200 basis points (bps) in 2018 and 2019 to about 15%, thanks to theintegration of Chemtura and related synergies, as well as various debottlenecking and manufacturing efficiency projects. At thesame time, we forecast free operating cash flow (FOCF) to debt slightly below 10% in 2018, and at about 15% in 2019-2020.
Downside scenarioWe might lower the rating if the ratio of FFO to debt fell below 30% without short-term prospects of a quick recovery. In our view,this may happen if LANXESS pursued a large debt-financed acquisition in excess of €1 billion, which we see as the main risk to therating. However, we believe that, in such a scenario, the group would likely manage to protect its credit metrics in light of itscommitment to maintain a solid investment-grade rating. Prolonged operating pressure associated with a significant reduction ofour adjusted EBITDA margin to below 13%, or inability to dispose of ARLANXEO, could also lead to a downgrade.
Upside scenarioWe could consider an upgrade if LANXESS improved its credit metrics, specifically with FFO to debt comfortably exceeding 45% andFOCF to debt above 25% on a sustained basis. However, we view such a scenario as unlikely, since we believe that the companywould most likely use any financial flexibility it gained to increase capex, acquisitions, or shareholder returns.
64
Business Risk
Satisfactory
Financial Risk
Intermediate
Anchor
bbb
Outlook
Stable
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Company Focus: Syngenta (BBB-/Stable/A-3)Key Strengths Key Risks
• Leading producer of crop protection products and No. 3 in the high-value commercial seeds market.
• Significant barriers to entry from material research and development (R&D) investments, resulting in resilient profitability given the high-value-added nature of the sector.
• Important growth opportunities in China following Syngenta's acquisition by ChemChina.
• Financial policy commitment from both ChemChina and Syngenta to maintain an investment-grade rating.
• High seasonality of working capital requirements due to geographic sales mix and tied to purchases timed for growing seasons.
• Dependence on agricultural commodity products' cyclical price patterns, farmers' incomes, and weather.
• Need for considerable R&D spending totaling 9%-10% of sales.
• High litigation risk.
Stable Outlook
The stable outlook reflects S&P Global Ratings' forecast that Syngenta will demonstrate a resilient operating performance, withadjusted EBITDA of about $2.5 billion in 2019 and $2.5 billion-$2.6 billion in 2020. Our outlook also factors in ChemChina'scommitment, as Syngenta's 100% shareholder, to maintaining credit metrics in line with an investment-grade rating, and ensuringtimely payment of Syngenta's debt obligations if necessary.
Downside scenarioWe could take a negative rating action on Syngenta if its adjusted funds from operations (FFO) to debt at declined to below 12%without near-term prospects of recovery. This could be caused by higher-than-currently-assumed dividends, or significant debt-financed acquisitions, which in turn would cause us to reconsider Syngenta's importance for ChemChina and its commitment tomaintaining the investment-grade rating on Syngenta. Pressure on liquidity could also cause us to revise downward Syngenta'sstand-alone credit profile (SACP). Based on our view of Syngenta's strategically important status within ChemChina's group andcorresponding three-notch uplift, we could revise downward Syngenta's SACP to 'bb-' before it would affect the long-term issuercredit rating on the company. Conversely, a one-notch downgrade of ChemChina to 'BBB-' would not affect the rating on Syngentabecause, in such scenario, we do not anticipate ChemChina would negatively influence Syngenta by requesting higher dividends,for example.
Upside scenarioThe current rating is constrained by our base-case forecast of Syngenta's FFO-to-debt ratio remaining at about 20%-22%, onaverage, in 2019-2020. It is further constrained by our assessment of ChemChina's credit quality, notwithstanding the corporategovernance structure--in which four of the 10 board members serve as independent directors--and ChemChina's strongcommitment to maintaining credit metrics in line with our investment-grade ratings on Syngenta at all times.
65
Business Risk
Strong
Financial Risk
Significant
Anchor
bbb
Modifier
CRA (-1notch)
Outlook
Stable
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Company Focus: Ineos Group Holdings (BB/Stable)Key Strengths Key Risks
• Strong market position as the second-largest producer of high-density polyethylene and third-largest producer of linear low-density polyethylene in Europe.
• Geographic diversity with a presence in the U.S., and access to advantaged feedstock for its U.S. operations and part of its European operations.
• Strong liquidity, with a comfortable debt maturity profile.
• Continued deleveraging, thanks to voluntary debt repayments and strong operating performance, on the back of top-of-the cycle conditions and structural improvements.
• Possible lower EBITDA in 2019 and 2020 due to a deterioration from the cyclical industry peak, new capacity hitting the market in 2019, and increasing risks to global economy growth.
• Volatile earnings and cash flows, reflecting the cyclicality of the commodity chemical industry.
• Complexity and contingent risks related to group structure and entrepreneurial ownership.
Stable Outlook
The stable outlook reflects S&P Global Ratings' view that Ineos Group Holding S.A. will report continued resilient EBITDA in 2019-2020 of about €2.0 billion-€2.3 billion. This is despite our view that industry conditions could deteriorate over the same period.
In our base case for 2019, we assume gradually decreasing oil prices to flatten the global cost curve, and that significant capacityadditions in North America to come on stream. We forecast Ineos will generate meaningful positive FOCF of about €400 million-€600 million, even under mid-cycle conditions in 2019-2020, and we view positively management's commitment to balance capitalexpenditures (capex) and mergers and acquisitions (M&A) to preserve a ratio of adjusted debt to EBITDA below 3x over theindustry cycle, which we regard as commensurate with the 'BB' rating.
Downside scenarioRating pressure could arise if Ineos' adjusted debt to EBITDA materially exceeded 3.0x in mid-cycle conditions. This would, forinstance, correspond to EBITDA declining to below €2 billion or a material change in the group's financial policy--for example ifIneos were to engage in large-scale, debt-financed M&A or pay sizable dividends.
Upside scenarioRating upside would depend on adjusted debt-to-EBITDA ratios staying at or below 2.0x over the cycle, with sufficient visibility onfinancial policy, capex, and M&A plans of the wider Ineos Group.
66
Business Risk
Satisfactory
Financial Risk
Significant
Anchor
bb+
Outlook
Stable
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Company Focus: OCI N.V. (BB-/Stable)Key Strengths Key Risks
• Favorable position on the global cost curve as a key strength.
• Transforming capacity expansion plan nearing completion, leading to a young and state-of-the-art asset base.
• Strong positions in fragmented markets.
• Anticipated strong free operating cash flow (FOCF) generation.
• Vulnerability to cyclical sectors with high price volatility.
• Relatively modest size with some concentration in geography and manufacturing footprint.
Stable Outlook
The stable outlook reflects our view that OCI will show a substantial strengthening in operating performance and a steepdeleveraging in 2018. We anticipate that this will follow the ramp-up of volumes and higher capacity utilization across new andexisting assets in the recovering market environment for both fertilizers and methanol, along with the large cash dividendanticipated from Natgasoline. The completion of large capital expenditure (capex) programs will lead to materially reduced capexand continuous strong free cash flow generation, which we expect OCI will use for deleveraging. The stable outlook also factors inour expectation that the company's funds from operations (FFO)-to-debt ratio will approach 20% in 2018 and exceed 20% in 2019.
Downside scenarioWe could lower the rating if the improvement in operating performance and the subsequent deleveraging were below ourexpectations, such that adjusted FFO to debt remained below 20%. This could follow weaker-than-expected market conditions,slower ramp-up of production volumes, and lower plant efficiency because of unexpected operational issues. In addition, negativefree cash flow, insufficient headroom under financial covenants, or a less supportive financial policy than we expected would alsoresult in downward pressure on the rating.
Upside scenarioWe could raise the rating if the expected improvement in operating performance, driven by successful completion of currentexpansion projects and volume ramp-up, were to materialize in the next 12-18 months, such that the adjusted FFO to debt wasconsistently and sustainably above 20%. In such a case, the company would also demonstrate sustained generation of significantfree cash flow over a cycle, and a financial policy in line with a higher rating.
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Business Risk
Fair
Financial Risk
Aggressive
Anchor
bb-
Outlook
Stable
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Company Focus: Oxea (B+/Stable)Key Strengths Key Risks
• Leading position as a European and U.S. producer of oxointermediate and derivative chemicals
• long-term supply contracts and an efficient pass-through mechanism that mitigates some of the innate volatility seen in the propylene spot price markets
• OXEA’s status as a moderately strategic operating subsidiary and strategic investment of the state-owned Oman Oil Company (OOC)
• Exposure to Europe where plants are less competitive
• Overall medium size of operations
• Supplier concentration for some of its key raw materials
Stable Outlook
The stable outlook reflects our expectation that OXEA's adjusted EBITDA in 2017 will amount to approximately €210 million-€220million, and that it will be sustained at about €200 million-€210 million in 2018, notwithstanding the planned outage atOberhausen and increasing propylene prices. We forecast adjusted debt to EBITDA below 5.0x at year-end 2017, and between4.8x-5.0x in 2018, in line with the 5x-6x range we view as commensurate with the rating.
Downside scenarioWe could lower the rating if OXEA is unable to continue the momentum seen in 2017, and adjusted debt-to-EBITDA were toweaken back toward 6x. In our view, this could happen if the company faced difficulty in passing through higher feedstock prices(notably of propylene) to customers, if the propanol project incurred delays or additional costs, or if OXEA faced renewedcompetitive pressure--as occurred in 2016 in its intermediates business. Further pressure could arise if OXEA's liquiditydeteriorated, if it were unable to generate positive FOCF, or if there were to be a change in our assessment of the likelihood ofextraordinary support provided by OXEA's parent, OOC.
Upside scenarioWe do not expect to raise the ratings over the next 12-18 months given our assumption of relatively limited EBITDA upside in2018. An upgrade could materialize over time, however, if we see adjusted debt to EBITDA sustainably and clearly below 5x andadjusted FFO to debt comfortably in excess of 12%, combined with a commitment from management and the shareholder tomaintain such leverage.
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Business Risk
Fair
Financial Risk
Highly Leveraged
Anchor
b
GRM
Moderately strategic (+1 notch from SACP)
Outlook
Stable
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Appendix 1: S&P Global Ratings Chemical Portfolio
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Tatjana LescovaAssociate [email protected]
EMEA Chemicals TeamLo
nd
on Paulina Grabowiec
Director and Lead [email protected]
Oliver KroemkerDirector and Lead [email protected]
Par
isFr
ankf
urt
Gaetan MichelAssociate [email protected]
• Israel Chemicals Ltd• K+S Aktiengesellschaft• Yara International ASA
• Sika AG• LafargeHolcim Ltd• Ferguson Plc
• Evonik Industries AG• Solvay SA• Lanxess SA
• Linde Aktiengesellschaft• Koninklijke DSM N.V.• Akzo Nobel N.V.
• OCI N.V.• Nitrogenmuvek• Novacap• Synthos
• Specialty Chemicals International B.V.• Brenntag AG• Oxea
• Arkema S.A.• L’Air Liquide S.A.• Orion Engineered Carbons, S.A.• Imerys S.A.• OCP S.A.
• BASF SE• BCP VII Jade• S.P.C.M SA• INEOS Styrolution
• Clariant AG• Eurochem Group AG
• Flint Group GmbH• Geberit AG
G. Andrew StillmanSenior Director and Analytical [email protected]
Anton GeyzeAssociate [email protected]
Mo
sco
w
• PJSC PhosAgro • PJSC Uralkali
Lucas Hoenn Rating Analyst [email protected]
• Inovyn Ltd• Archroma Holdings S.a.rl.
• Atotech UK TopCo Ltd• Travis Perkins Plc
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What Is Behind Most Recent Rating Actions?Date Issuer Rating Action To From Rationale
Mar 20, 2019 Perstorp Holding AB Upgrade B/Stable B-/Stable On Debt Reduction And Stronger Credit Metrics
Nov 16, 2018 Arkema S.A. Upgrade BBB+/Stable BBB/Stable On Rising Metrics Leeway
Aug 09, 2018 LANXESS AG Upgrade BBB/Stable BBB-/Stable On ARLANXEO Disposal Announcement
Jul 23, 2018 Perstorp Holding AB Upgrade B-/Stable CCC+/Positive On Sustained EBITDA Growth And Deleveraging
May 29, 2018Specialty Chemicals International B.V.
Upgrade B+/Stable B/Stable On Strong Performance Post Merger
Feb 28, 2018 OXEA S.a.r.l., Luxembourg Upgrade B+/Stable B/Positive On Stronger Credit Metrics
Feb 25, 2019 PhosAgro PJSC Outlook Revised BBB-/Stable BBB-/NegativeOn Stronger Cash Flows and higher phosphate and nitrate fertilizers prices
Feb 13, 2019 Sika AG Outlook Revised A-/Stable A-/NegativeOn Anticipated Deleveraging And Prudent Financial Policy
Jan 29, 2019 Linde AG Downgrade A/Stable A+/Stable On Parent's Financial Policy
Dec 19, 2018 BCP VII Jade (‘Acetow’) Downgrade B/Stable B+/Stable On Weaker-Than-Expected Performance
Oct 12, 2018 Nitrogenmuvek Zrt. Downgrade B-/Stable B/Stable On Weak Operating Performance
Oct 02, 2018 Akzo Nobel N.V. Downgrade BBB+/Stable A-/Negative On Disposal Of Specialty Chemicals Business
Apr 25, 2018 Flint HoldCo S.a r.l. Downgrade B-/Stable B/Negative On Lower Earnings Forecast
71
6
5
Positive Outlook Rating Rationale Negative Outlook Rating Rationale
EuroChem Group AG BB-/Positive Recovering prices and weakened rubble K+S AG BB/Negative On Ongoing Weak Ratios
Orion Engineered Carbons S.A.
BB/Positive Debt improving sustainably Monitchem Holdco 2 S.A.
B-/Negative Prolonged weakness in crop-protection industrypre
Uralkali OJSC BB-/Positive Recovering prices and weakened rubble OCP S.A. BBB-/Negative Following Sovereign Outlook Revision
2
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Recent S&P Publications
Russian Fertilizer Producer PhosAgro Outlook To Stable On Stronger Cash Flows; 'BBB-' Rating Affirmed, Feb. 25,2019
Sika Outlook Revised To Stable On Anticipated Deleveraging And Prudent Financial Policy; 'A-' Rating Affirmed,Feb. 13, 2019
Sika AG's Proposed Mandatory Convertible Bond Assessed As Having High Equity Content And Assigned 'BBB'Issue Rating, Jan. 22, 2019
Sika Outlook Revised To Negative On Uncertainty Over Ultimate Financing For Parex Acquisition; 'A-' RatingAffirmed, Jan. 8, 2019
Ireland-Incorporated Industrial Gases Company Linde PLC Assigned 'A/A-1' Ratings; Outlook Stable, March 5,2019
Nouryon Holding, Consolidating Entity Of Nouryon Group, Rated 'B+'; Outlook Stable; Nouryon CooperatiefRatings Withdrawn, Feb. 26, 2019
Praxair Inc. Ratings Affirmed On Downgrade Of Merger Partner Linde AG; Off CreditWatch; Outlook Stable, Jan.29, 2019
Industrial Gases Producer And Engineering Co. Linde Downgraded To 'A' On Parent's Financial Policy; OutlookStable, Jan. 29, 2019
Akita MidCo, Parent Of Chemicals Distributor Azelis Affirmed At 'B' On Debt-Funded Acquisitions; OutlookStable, March 11, 2019
Specialty Chemicals Company Perstorp Upgraded To 'B' On Debt Reduction And Stronger Credit Metrics;Outlook Stable, March 20, 2019
Industry Top Trends 2019 - Chemicals, Nov. 12, 2018
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Macroeconomic Outlook
73
Key Assumptions:
• Our key assumptions include steady global demand forchemicals products despite the potential for slower GDPgrowth in North America and Europe, offset by a pickup inLatin American GDP and solid GDP growth in Asia-Pacific.
• We assume steady demand from key end markets such ashousing, automotive, and general industrial.
• We anticipate that global supply and demand should begenerally in balance, and capacity additions should be largelyabsorbed.
• We also assume generally stable oil prices at $60/bbl in 2019.
Regions GDP (Real, YoY%)
2015 2016 2017 2018 2019F 2020F 2021F 2022F
Asia Pacific 5.5 5.6 5.6 5.5 5.2 5.3 5.4 5.2
Europe 1.6 1.9 2.9 2.2 1.4 1.9 1.8 1.7
Mid. East - North Africa
3.7 3.5 1.1 2.9 3 3.2 3.2 3.4
North America 2.9 1.6 2.2 2.9 2.2 1.7 1.7 1.8
World 3.5 3.3 3.8 3.7 3.4 3.6 3.6 3.6
Oil Brent ($/bbl) 52 43 50 70 60 60 55 -
Natural Gas Henry Hub ($/mil. Btu)
2.6 2.5 3.0 3.0 3.0 3.0 3.0 -
2015 2016 2017 2018 2019 2020
Forecast
2015 2016 2017 2018 2019 2020
Forecast
Chemical Industry Revenue Growth (local currency) Chemical Industry EBITDA Margin (adjusted)
Source: S&P Global Ratings; First-Quarter 2019 Regional Credit Conditions Commentaries.
WTI Crude Oil Price Assumptions For 2019 And 2020 Raised To $55 Per Barrel; Apr 22, 2019
).
S&P Global Ratings Macroeconomic Forecasts
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Appendix 2: S&P Global PlattsAdditional Data
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0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0
20
40
60
80
100
120
140
160
2013 2015 2017 2019 2021 2023 2025 2027 2029
Million mtVirgin and Recycled PE Demand
Virgin PE Demand Recycled PE (% of Virgin Demand)Recycled HDPE (% of Virgin Demand) Recycled LDPE (% of Virgin Demand)Recycled LLDPE (% of Virgin Demand)
HDPE will continue to dominate recycled PE
markets and is expected to reach 15% of virgin
demand by 2029.
Source: S&P Global Platts Analytics
Announcements by brands: Announcements by Governments:
• Japan: 100% PET recycling ratio by 2030
• EU Package: 65% recycling by 2025 and 70% recycling by 2030
• Australia: 70% recycling by 2025 and all packaging to include 30% average recycled content by 2025
Environmental pressures and social media has led to the adoption of ambitious PET recycling targets from leading global F&B brands.
Target: 50% R.PET use by 2030
Target: 50% R.PET use by 2030
Target: 50% R.PET use by 2025
Target: 50% R.PET use for
waters and beverages; 100% for
selective products by 2025
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Appendix 3: S&P Global Ratings Criteria
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Corporate Ratings Criteria Framework
78
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79
Anchor
• When two anchor outcomes are listed for a given combination of business risk profile assessment and financial
risk profile assessment:
• If the FRP is 3 or stronger, the anchor will be based on the comparative strength of its competitive position.
• If the FRP is 4 or weaker, the anchor will be based on the comparative strength of its cash flow/leverage.
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80
Financial Risk Profile
• We calculate the indicative ratio by weighting the previous two years (10-15%), the current year (25%) and the
forecasted two years (25%-25%).
• Preliminary financial outcome might be adjusted down by a category, depending on our assessment of volatility
and cyclical downside to our base case forecast.
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81
Specialty Chemicals Industry Key Credit Factors
“Low-risk (2)” industry given its intermediate
cyclicality risk and low degree of competitive
risk and growth.
• Key drivers of cyclicality in the specialty chemicals
industry include the level of global economic growth,
industrial and manufacturing production, capacity
utilization, and the balance of industry supply and
demand.
Key Credit Factors for the Specialty Chemicals Industry, published December 31, 2013
Effectiveness of barriers to entry Low risk
Level and trends of industry profit margin Medium risk
Risk of secular change and substitution Low risk
Risk in growth trends Low risk
We determine level of profitability on a three point scale:
"above average," "average," and "below average”.
Competitive Position – Capital or Asset focus
• To assess competitive risk and growth, we assess :
• Debt to EBITDA and FFO to debt are the core ratios used
to measure cash flow leverage for Specialty Chemicals.
• As a supplementary ratio, we emphasize FOCF to debt
when core ratios point to intermediate or stronger, or CFO to
debt for working capital-intensive companies
• EBITDA to interest when core ratios point to significant risk
profile or weaker, or FFO interest coverage when non-cash
interests are large.
Cash Flow Leverage analysis
Components Aspects considered Weight
Competitive
Advantage
• Market position, robustness and sustainability of business strategy, track record of execution;
• Product or service profile, including differentiation attributes, technical expertise, and service capabilities;
• Ability to maintain sufficient R&D and capital investment.
30%
Scale, Scope
& Diversity
• Depth and breadth of its product offering;
• Diversity of raw material inputs and end-markets;
• Relative size of revenue base and target markets;
• Geographic balance of sales and manufacturing footprint
• Level of supplier and customer concentration.
30%
Operating
Efficiency
• Relative cost position;
• Flexibility of cost structure in absorbing volatility of demand or input costs;
• Success in passing through raw material costs;
• Flexibility of production.
40%
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82
Commodity Chemicals Industry Key Credit Factors
“Moderately high-risk (4)” industry given its
moderately high risk cyclicality and
moderately high degree of competitive risk
and growth.
• Key drivers of cyclicality include economic growth,
industrial and manufacturing production, the balance of
industry segment supply and end-market demand.
Key Credit Factors for the Commodity Chemicals Industry, published December 31, 2013
Effectiveness of barriers to entry High risk
Level and trends of industry profit margin High risk
Risk of secular change and substitution Medium risk
Risk in growth trends Medium risk
We determine level of profitability on a three point scale:
"above average," "average," and "below average”.
Competitive Position - Commodity Focus/Cost Driven
• To assess competitive risk and growth, we assess :
• Debt to EBITDA and FFO to debt are the core ratios used
to measure cash flow leverage for Commodity Chemicals
• As a supplementary ratio, we emphasize FOCF to debt
when core ratios point to intermediate or stronger, or CFO to
debt for working capital-intensive companies
• EBITDA to interest when core ratios point to significant risk
profile or weaker, or FFO interest coverage when non-cash
interests are large.
Cash Flow Leverage analysis
Components Aspects considered Weight
Competitive
Advantage
• Market position;
• Sustainability of business strategy;
• Ability to maintain sufficient capital investment; and
• Execute projects successfully.
15%
Scale, Scope
& Diversity
• The relative size of its revenue base and that of its target markets; and
• Depth and breadth of product offering;
• Diversity of raw material inputs and end markets;
• Geographic balance of sales, profits and manufacturing footprint;
• Level of supplier and customer concentration.
35%
Operating
Efficiency
• Relative cost position compared with that of industry peer;
• Flexibility of its cost structure in absorbing volatility of demand or input costs;
• Flexibility of production.
50%
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