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US ethylene & ethylene product chain demand to grow 6.5%
Aug '12
Fitch Ratings believes ethylene margins from ethane feedstock are likely to be higher than naphtha-based production for a number of years due to relatively low-cost ethane produced by North American shale plays. This gives chemical companies incentive to build ethane-based ethylene capacity, and company believes this activity could potentially reduce balance sheet flexibility.

U.S. capacity could rise from 26.6 million tonnes this year to more than 35.0 million tonnes per year by 2018, with peak spending occurring in 2015 and 2016, based on announced expansion plans. The wave of cracker expansions set to hit the industry may place interim pressure on credit metrics, depending on timing and other spending priorities and all other factors equal. Even the largest free cash flow (FCF) producers in the chemicals industry are likely to experience material negative effects on FCF when spending on these capital projects.

Stress scenarios in the pre- and post-expansion chemicals credit environment could potentially differ dramatically. Pre-expansion, recessionary pressure is most likely to be the cause of industry stress. Company believes stronger positioned credits include those with more modest expansion plans and plentiful and clear access to cash as well as material FCF.

U.S. ethylene and ethylene product chain demand would have to grow by 6.5% per annum in order to absorb the anticipated supply increase, indicating the current expansion is aimed in part at exports. In the event ethylene exports are not cost-competitive, possibly due to diminished feedstock margin differential, large, diversified chemicals companies and specialty chemical manufacturers will likely have more stable credit profiles.

Fitch Ratings

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