U.S. chemical plants are expected to grow in the coming months as they take advantage of cheap natural gas prices and a strengthening economy that has boosted domestic demand for raw materials used in housing and automobiles, a new credit rating analysis finds.
But falling oil prices and a strong U.S. dollar threaten earnings for several domestic chemical companies, according to an economic and ratings outlook compiled by Standard & Poor’s Ratings Services.
Domestic chemical companies have been able to crank out chemicals at a lower cost because they rely primarily on natural gas to feed their operations while their overseas competitors typically use oil-based inputs to make chemicals. But crude prices began collapsing last year, foreign chemical companies have been able to make chemicals using a cheaper feedstock, making them more competitive against U.S. suppliers.
The lingering global crude slump may also force down the prices chemical companies fetch for their products, potentially sapping some of the healthy profits U.S. firms have been enjoying, the ratings service found.
Despite the uncertainty, the ratings service said the outlook for the U.S. chemical sector is stable.
“Somewhat favorable macroeconomic and industry-specific conditions will support demand growth over the next year for most companies in the industry,” the report said.
The dollar is expected to continue strengthening this year and next, potentially hindering US. firms from exporting their products overseas. But the U.S. economy is growing and Americans are spending more, fueling increased demand for the raw materials used to make plastics, additives, coatings and other goods. That’s good news for domestic chemical companies, who make products that are primarily consumed in the U.S.
In addition, U.S. companies will likely continue benefiting from the tidal wave of cheap natural gas unleashed by the U.S. shale boom. That means that companies that make ethylene and polyethylene, the building blocks for plastics, are particularly well-suited to stay competitive against foreign suppliers and benefit from an expected uptick in demand in the coming year, the ratings report found.
“North America will retain its cost advantage in terms of polyethylene over the next few years and certainly over the next 12 months,” Standard and Poor’s credit analyst Paul J. Kurias said in a webinar Wednesday. “We believe in terms of the cost curve, North American producers will be lower on that cost curve than Asian producers.”