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Specialty, Commodity Chemicals Recovery Stuck Behind Autos In Slow Lane

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Elevated EBITDA Addbacks Are A Continuing Trend


Specialty, Commodity Chemicals Recovery Stuck Behind Autos In Slow Lane

The global automotive industry, a key end market for the commodity and specialty chemicals sector, is trying to rev its way back up to top gear. Auto production stalled in the second quarter of 2020 in response to the coronavirus spread and anticipated downward pressure on new vehicle demand across the globe.

Shutdowns affected not only the automotive sector, but also industries for which automakers are key customers--especially in April, May, and June. However, they have since shown some signs of life in the summer months as economies reopened and production resumed. As the auto sector started to rebound, it lifted certain specialty and commodity chemical producers that serve the industry.

In March, S&P Global Ratings forecast a 15%-20% decline in global light vehicle sales given the anticipated magnitude of the economic fallout from COVID-19-related shutdowns. Six months later, the revised forecast is for the higher end of that range, a 20% decline year over year to 73 million in 2020. Sales declined 24.6% in the first half, a decline unseen in the auto industry's more than 100-year history.

Table 1

Updated 2020-2022 Global Light Vehicle Sales Forecast
Percentage year-over-year change as of Sept. 16, 2020
--Previous projections*-- --New projections**--
2020 2021 2020 2021 2022
U.S. (25) 19 (20)-(22) 13-15 3-5
China (8)-(10) 2-4 (6)-(9) 4-6 2-4
Europe (20) 9-11 (20)-(25) 8-10 8-10
Rest of the World (15) 6-8 (25) 6-8 10-12
Global (14)-(16) 6-8 (20) 7-9 7-9
*As of March 23, 2020. **As of Sept. 16, 2020. Source: S&P Global Ratings.

We predict global light vehicle sales will remain below 2019 levels through 2022. Not only does this muted medium-term forecast affect automakers, but also companies for which the auto sector serves as a major end market. This includes those in specialty and commodity chemicals that manufacture various components used in vehicle production, including resins, adhesives, coatings, sealants, oil additives, synthetic rubbers, and plastics.

COVID-19 Impact

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Some larger players in the specialty and commodity chemicals sectors have faced significant headwinds in their automotive-related segments, especially in the second quarter of 2020, as curtailed production by key customers significantly reduced volumes for companies such as LyondellBasell Industries N.V. and The Dow Chemical Co. This comes on the heels of a challenging 2019, with global light vehicle sales dropping nearly 5% and hitting their lowest level since 2015. LyondellBasell's intermediates and derivatives, refining, and advanced polymer solutions (APS) segments were affected by significant reductions in demand for transportation fuels and polymers utilized in automotive manufacturing. APS segment sales volumes declined in the second quarter and first six months of 2020, stemming from lower market demand for compounding and solutions, including the automotive market. This led to a 39% decrease in revenue in the second quarter and 26% for the first six months.

We believe the company's EBITDA and credit measures will significantly deteriorate in 2020 due to the global recession, and funds from operations to debt will remain below 30% for a prolonged period beyond 2020. Therefore, on April 3 we lowered our issuer credit rating on LyondellBasell one notch to 'BBB' from 'BBB+' with a negative outlook.

Dow's automotive-related segments represent about $2 billion-$2.5 billion of annual sales. Its sales declined 18% in the first six months. Volume declined for products used in consumer durable goods end markets, including automotive, with the most notable impact in the industrial intermediates and infrastructure and performance materials and coatings operating segments. On April 9, we downgraded Dow and its rated subsidiaries to 'BBB-' from 'BBB'. The downgrade incorporated our expectations for earnings setbacks in 2020 and 2021 relative to our previous projections. The stable outlook reflects our expectation that management will take steps to preserve credit quality, and that Dow will retain key long-term business strengths through a temporary but severe downturn in demand and related challenges.

Another commodity chemicals company with significant automotive exposure, TPC Group Inc., creates butadiene and C4s that go into synthetic rubber used in tire manufacturing. Some of its key customers include major tire manufacturers such as Goodyear Tire and Rubber Co., The Michelin Group, and Firestone Tire and Rubber Co. Production cuts, and in some cases halted production from March-May, resulted in a 50% decline in butadiene price during that period. Butadiene pricing and volumes are recovering consistent with expectations as tire manufacturers began to ramp production back up in June. LyondellBasell's olefins and polyolefins segment was similarly impaired in the second quarter of 2020 due to lower prices for butadiene and other C4s. We lowered the issuer credit rating on TPC one notch to 'B-' from 'B' with a negative outlook on April 7, largely due to headwinds in its key end markets.

Refining/Oil Additives

Some chemicals companies face COVID-19 hurdles in their refining and petroleum additives segments, as a dramatic reduction in miles driven in the first half led to a corresponding reduction in fuel demand and production. One such company in the first half was NewMarket Corp., whose petroleum additives net sales decreased 11.7% from the prior year, primarily due to both lower lubricant additives and fuel additives product shipments. Shipments to customers in the second quarter were down 25.1% from the first quarter. The low point was in May, and in June the company reported some improvement in North America and Asia-Pacific, the latter of which recovered to shipment levels on par with June 2019. Our 'BBB+' rating and stable outlook on NewMarket are unchanged through the downturn.

LyondellBasell's intermediates and derivatives segment struggled in the second quarter, as oxyfuels and related product margins decreased due to lower product prices. Volumes declined as well due to lower gasoline and isobutylene demand. Transportation fuel trends are improving as economic reopening continues into September. The uptick in vehicle miles driven and lower gasoline inventories with increased consumption is increasing refining utilization as production ramps up, although we believe the company's refining segment will not reach pre-COVID-19 levels until 2021 at the earliest.

While Albemarle Corp. derives a significant portion of EBITDA from lithium, it also has a segment that produces catalysts used in refining. In the second quarter, Albemarle's net sales were down about 13% and adjusted EBITDA was down about 29% from the second quarter of 2019. Management stated publicly that third-quarter operating performance will be the company's worst, implying the direct impact of COVID-19 is lagging by one quarter compared to most of its peers. This assumes the macroeconomic situation does not deteriorate further. For the full year, Albemarle expects EBITDA in its lithium segment to be down sequentially 10%-20%, mostly due to lower sales volumes. It expects its bromine segment to be flat sequentially, and its catalysts segment to be down 50%-60% year over year. This demand pressure was not unexpected, however. On April 23, we lowered our issuer credit rating on Albemarle one notch to 'BBB-' from 'BBB' with a stable outlook due to concerns around EBITDA and credit measures in light of the macroeconomic downturn.

What Does This All Mean For Electric Vehicles?

The market penetration of electric vehicles (EVs) has increased rapidly over the last several years, and with that comes higher demand for the lithium-ion battery. The compound annual growth rates expected for lithium over the next five years is among the highest of all end markets served by chemical companies. Two major global lithium producers--Albemarle and Sociedad Quimica y Minera de Chile S.A.--stand to benefit from the increased EV market penetration and previously announced plans to accelerate lithium capacity expansions.

However, we believe the growth rates in 2020 have taken a bit of a pause, in large part due to the COVID-19 pandemic. Albemarle expects 2020 EBITDA in its lithium segment to be down 10%-20%, in large part due to the decline in auto manufacturing. Additionally, the company faces lower market prices and higher inventory in the battery channel. Albemarle forecasts that the demand profile for battery-grade lithium has been pushed out by about one year and that it is a bit steeper than previously forecast. The company believes additional stimulus measures, such as consumer incentives in Europe, will drive the boosted demand, and that the industry will still arrive at about 1 million net tons of total demand by 2025, driven by electric vehicles. We believe the third and fourth quarters of 2020 will be the low point for the lithium industry, and that the market will begin to recover heading into 2021.

Table 2

Key Chemical Sector Rating Actions
--As of March 1, 2020-- --As of Sept. 24, 2020--
Company Rating Outlook Rating Outlook

LyondellBasell Industries N.V.

BBB+ Negative BBB Negative

The Dow Chemical Co.

BBB Stable BBB- Stable

Momentive Performance Materials Inc.

BB- Stable B Negative

Albemarle Corp.

BBB Stable BBB- Stable

Cabot Corp.

BBB Stable BBB- Stable

TPC Group Inc.

B CW Negative B- Negative
Source: S&P Global Ratings.

Rebound Has Begun, But It Will Take Time

Based on company commentary, we believe volumes troughed for chemical firms with heavy auto exposure, but there are signs of life. We expect gradual volume growth, albeit from low second-quarter levels, as automakers ramp up production while economies reopen. For example, August was the fourth-straight month of sequential growth in U.S. light vehicle sales from an April trough. Well diversified chemical companies may improve more rapidly, especially those with ties to more stable consumer and pharmaceutical end markets offsetting some slowness in industrials and the auto sector.

In the second quarter, S&P Global Ratings published a heat map laying it out its EBITDA expectations by industry. At that time, on average we expected EBITDA declines of 15%-25% in 2020 from 2019 for North America chemical companies, and that 2021 EBITDA would be 10%-20% below 2019 levels. In contrast, we expected North American automotive companies' 2020 EBITDA to decline 25%-40%, with 2021 EBITDA remaining 20%-30% below 2019 levels. This helps depict our expectation that, while the automotive end market is showing signs of life the past few months, it's rebounding from such weak levels that it will take some time before global volumes recover to pre-2019 figures.

It is too early to tell what kind of full impact the slowdown will have long term on the chemical sector, but as a whole it has managed its variable costs relatively well, somewhat reducing the EBITDA shortfall for 2020. In 2021, chemical companies may face cost and earnings headwinds tied to plant shutdowns in line with automakers' as well as travel and entertainment costs as plants and travel come back online.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Edward J Hudson, New York + 1 (212) 438 2764;
edward.hudson@spglobal.com
Secondary Contact:Daniel S Krauss, CFA, New York (1) 212-438-2641;
danny.krauss@spglobal.com
Research Assistant:Andrew J Stafford, New York

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