Fitch Ratings expects a gradual recovery to continue for the global chemicals industry as global chemicals markets stabilized in the first half of 2009 and continue to rebound from record lows. In Fitch's North American & EMEA chemicals outlook reports, the company says the recovery in demand for chemical products will remain fragile next year with significant regional disparities in the growth trends reflecting varying economic expansion forecasts. Asia (China and India) and, to a lesser extent, South America (Brazil) are expected to continue driving global demand while anemic economic recovery will constrain prospects in the Western European and North American markets.

"The EMEA chemicals industry is expected to be marked by a modest pace of expansion from the record low base of 2009", said Myriam Affri, Director at Fitch. "The economic downturn really took its toll on the credit profile of the European chemicals industry; however, headroom is likely to widen in 2010, particularly for issuers at the higher end of the rating spectrum where negative rating actions had reflected aggressive financial profiles and policies at the peak of the cycle."

Fitch expects that growth rates for the North American chemicals industry will be capped in the low- to mid-single digits in 2010. At this rate, the industry will likely need two to three years before North American chemicals product output will match pre-crisis levels again. In the U.S., the default rate for chemicals reached an all-time high with 17.7% year-to-date. At the end of the third quarter of 2009, leverage and coverage ratios with trailing 12-months calculations reached a trough for most players, as the calculation now includes four quarters of recession impacts.

"We anticipate that it will take several quarters before the credit profiles of most North American chemicals will return to more normalized, mid-cycle levels given the expected slow and gradual nature of the recovery," said Tom Dohrmann, Director at Fitch.

Fitch says other factors clouding the near-term sector outlook include renewed inflationary cost pressures, particularly at levels of the value chain where structural overcapacities persist and where producers' pricing power is strongly dictated by supply-demand balance. The phasing out of stimulus packages and structural overcapacity at various levels of the value chain could threaten demand momentum. For European players, the weakening U.S. dollar could also pose a challenge.

The path to recovery will be particularly challenging in commodity chemicals segments, where players are not only exposed to the cyclicality along major basic chemical and plastic value chains, but also struggle with new capacity coming online in the Middle East. The cost advantage afforded by the substantially cheaper feedstock supply means that the new production facilities can operate profitably at prices where Western European and North American capacity becomes uncompetitive. While the permanent shutdown of inefficient high-cost capacity in Europe and North America during the downturn partly offset the impact of the new supply on global balance, the net effect is expected to outpace demand growth in the near to medium term.

Specialty chemicals products without much differentiation will face stiff competition and will become commoditized much faster than before. As a result, specialty companies with product portfolios geared toward commoditized specialty products will change their strategy to purely low-cost manufacturing. In contrast, specialty chemicals with high value-adding, innovative product portfolios will increasingly focus on research and development in order to maintain the cutting edge nature of their products.