EMEA Chemicals Landscape 2019 - 21 May 2019, Tel Aviv
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EMEA Chemicals Landscape 2019
21 May 2019, Tel Aviv
Copyright © 2019 by S&P Global.
All rights reserved.
Today’s Presenters
Andrew is a Senior Director at S&P Global Ratings and is currently the Analytical
G. Andrew Stillman
Manager for Chemicals, Materials & Construction portfolio.
Senior Director, Analytical Manager
Andrew.Stillman@spglobal.com 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-
S&P Global Ratings, London ordinator for business service companies. He also previously covered companies
in the transportation and mining and oil & gas sectors.
Paulina Grabowiec Since joining S&P Global Ratings over 13 years ago, Paulina progressed through
Director, Lead Analyst various roles in the Commodities team responsible for issuers in chemicals and
Paulina.Grabowiec@spglobal.com metals & mining industries.
Paulina is responsible for Chemicals and Building Materials issuers in EMEA,
S&P Global Ratings, London covering several high-profile names including K+S, Yara International, Sika AG,
LafargeHolcim and Israel Chemicals Ltd.
Hetain is a Lead analyst for petrochemicals for S&P Global Platts Analytics. He is
Hetain Mistry
responsible for the global short and long term market analysis and polyolefin and
Lead Analyst, Petrochemicals
aromatics publications.
Hetain.Mistry@spglobal.com
Hetain has close to 15 years’ experience within the oil, NGL and petrochemical
S&P Global Platts Analytics, London consulting and analytics industry in London and in Singapore, working on various
market studies across refinery and petrochemical value chains for all regions.
2
Agenda
• EMEA Chemicals Ratings Landscape Paulina Grabowiec
• Outlook On The Fertilizer Industry Paulina Grabowiec
• Global Polyolefin Outlook Hetain Mistry
• ESG in Credit Ratings G. Andrew Stillman
• Q&A
3
EMEA Chemicals Ratings Landscape
4
Global Chemicals: Trends And Outlook
Developing, Net Outlook
WatchPos, 1% Bias (%)0
2% Negative,
WatchNeg, 8% Apr-19
1% -5
Positive, 4%
-10
-15
-20
Stable, 85%
-25
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Ratings outlooks data as of May 1, 2019.
• The chemical sector's rating outlook swung into neutral territory briefly in 2018 and in the first part of 2019, after years
of negative bias.
• Prices for especially volatile commodity chemicals, including titanium dioxide, and fertilizers were stable to improving in
2018. Some commodity chemicals prices have benefitted from the closure of capacity in China as part of the
government'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.
5
EMEA Chemicals: Trends And Outlook
Negative trend Positive trend Stable
Upgrades Downgrades
6%
6% 4
9%
17%4% 3 3
4% 2 2
79% 2
87% 1 1 1 1 1 1
87%
Dec 2017
Dec 2018 0 0
0
Apr 2019
Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 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 and
consistent deleveraging, while downgrades (Linde, Acetow, Nitrogenmuvek, Akzo Nobel, Flint) followed weak operating
performance, but also financial policy and M&A events. We revised the outlook to stable from negative on Sika AG (on anticipated
deleveraging) 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.
Source: Standard & Poor’s Ratings Services. Based on 47 public credit ratings in Chemicals as of April 23, 2019.
6EMEA Chemicals: Portfolio Evolution
10
5
0
BBB
BB+
BB-
A
BBB+
BBB-
B
CCC+
A+
A-
BB
B+
B-
December 2017 December 2018 April 2019
2%
17% 15%
20% A category
35%
BBB category
As of
As of April
December BB category
2019
2017 B category
30%
24% CCC category
17% 20%
• 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.
Source: Standard & Poor’s Ratings Services. Based on approximately 50 public credit ratings in Chemicals as of April 23, 2019.
7Key Rating Actions In EMEA Chemicals
2nd March 2018: ‘BBB-’ rated Syngenta’s rating was affirmed and removed from CreditWatch Negative. The
affirmation reflects our view of Syngenta having a strategic role in the modernization of China's agriculture, as
confirmed 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.
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 sovereign
wealth fund GIC Private Ltd., in our view Akzo's business has reduced in size and scope. We consider a ratio of
funds from operations (FFO) to debt of about 45%-60% as commensurate with the 'BBB+' rating.
12th October 2018: Downgraded To 'B-' On Weak Operating Performance. The downgrade reflects
Nitrogenmuvek'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 previous
expectations of adjusted debt to EBITDA below 6.0x and FFO to debt of about 12%, in both 2018 and 2019.
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 is
stable. 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&P
adjusted funds from operations to debt at the higher end of the 35%-40% range in 2019-2020.
8Chemicals Key Risks And Opportunities 2019
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.
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.
9Chemical Credit Outlook – Stable, But Risks Lurking
EBITDA broadly stable on unchanged supply-demand balance in most
SPECIALTY products, cost-efficiencies, and demand at least in line with global GDP
CHEMICALS with pockets of relative strength especially if linked to stable end-
markets.
Margins could come under pressure due to major ethylene and PE
COMMODITY capacity additions resulting in overcapacity and lower prices. Similar story
CHEMICALS for propylene, with new on-purpose capacity leading to lower prices and
mid-cycle conditions.
Falling inventories and slowly improving grain prices, albeit from a low
AGROCHEMS level, should provide support to farm economics and demand for
fertilizers.
Industry emerging from bottom of the cycle conditions, but delays to
FERTILIZERS 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.Trend #1: Leverage Could Improve, But…
Forecast Forecast
2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020
• Globally, we expect that stable EBITDA margins and modestly declining rates of revenue growth
will contribute to a very gradual improvement in debt leverage metrics for chemicals companies in
2019 and beyond.
• Debt to EBITDA will strengthen in 2019 from a global perspective, but this primarily reflects a
strengthening in North America and Europe. This is partly because we do not generally forecast
large 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 reflecting
high levels of capital spending in this region.
11Trend #2: Growth Strategy And Financial Policy Are Key
2007 2009 2011 2013 2015 2017
• We assume that chemicals companies will adjust key elements of their financial policies such as
dividends 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 risk
related to the dividend payout increase.
• We would view a similar amount of dividend payouts in a more challenging operating environment as a
reflection of a more aggressive financial policy than we currently factor in our ratings, and therefore as
a credit risk.
• We do not assume record-high dividend payouts for the sector in 2019 if M&A picks up or operating
cash flow weakens.
12Trend #3: Growth By Selective Bolt-On M&A To Continue
€, bn
100 25% 25 5%
80 20% 20 4%
60 15% 15 3%
40 10% 10 2%
20 5% 5 3 1%
4.2
0 0% 0 0%
2006 2008 2010 2012 2014 2016 2018 2006 2008 2010 2012 2014 2016 2018
Chem sector M&A deals - EU31 (lhs) EU Chem M&A deal count (lhs)
EU31 Chem Sector Deals - % of Total EU31 M&A volumes (rhs) EU Chem sector deal count - % of Total EU M&A deal count (rhs)
• 3 deals involving a European target to April 30, 2019, as issuers
had already been very active in 2016 and 2018.
25%
RoW 46%
• European chemical assets remain principally the target of 25% 67% 67%
North American buyers. North America
31%
APAC
• We assume that targeted bolt-ons will continue to support 50%
33% 33%
growth and diversification. Europe
23%
2016 2017 2018 2019 YTD
Source: Capital IQ, with YTD as of April 30, 2019. European target include transactions announced
with an EV above USD100 million.
13Moderate Headroom For Many Issuers, With Few Exceptions
FFO-to-Debt 2019 (S&P Projections)
Minimal 60% Modest 45% Intermediate 30% Significant 20% Aggressive 12%
Akzo Nobel
L’Air Liquide
Arkema
BASF
Clariant
DSM
Evonik
SIKA
Lanxess
Linde
Solvay
Syngenta
Debt-to-EBITDA 2019 (S&P Projections)
0.0x 1.5x 2.0x 3.0x 4.0x 5.0x
INEOS Group
Israel Chemicals
S&P forecast (2019) S&P guidance for current rating level (minimum ratio that needs to be maintained)
14Outlook On The Fertilizer Industry
15Commodity Prices & Futures
130%
120% • Falling inventories and gradually improving grain
110% prices, albeit from a low level, should provide
100% support to farm economics and demand for
90% fertilizers.
80%
Corn Soya Bean Wheat
• Commodity prices to remain dependent on
70%
weather patterns, climate changes, availability of
60%
17-ינו 17-יול 18-ינו 18-יול 19-ינו 19-יול 20-ינו 20-יול 21-ינו 21-יול
land and the efficiency of its use, inventory levels,
and growing population and demand for meat.
USD
1,200
1,000
800
600
400
200 Corn Soya Bean Wheat
0
17-מאי 17-נוב 18-מאי 18-נוב 19-מאי 19-נוב 20-מאי 20-נוב
Source: Bloomberg; Chicago Board of Trade (CBOT). Grain prices indexed to Jan 2017.
16Current Market Conditions: Cereal And Oilseeds
World Rice Thailand World Maize (Corn) FOB Gulf Mexico World Soybeans US Chicago
World Palm Oil Malaysia
World Wheat FOB Gulf Mexico
World Rapeseed Oil Crude FOB Rotterdam
USD USD
500 1000
400 800
300 600
200 400
100 200
0 0
• The estimated 2018 world cereal production is down by 1.8%, • Aggregate production of oilseeds grew by 3% in 2018, higher
largely on account of lower maize and wheat outputs, that soybean and sunflowers production more than offset
more than offset the increase in rice. decreases for peanut and rapeseed productions during the
year.
• Utilization, however, is estimated to increase by 1.1% from
2017 level. The bulk of this growth stems from rising food use • Soybean production recovered post a decline in 2017, growing
and strong demand in Asia. by 6.2% in 2018. US soybean stocks are estimated to be
historically high, pressuring prices. 25% tariff on soybeans
• This implies higher utilization of world cereal stocks during the exported from the US to China (in effect in July 2018) not
year. The estimated global cereal stock-to-use ratio is down helping.
from a relatively high level of 32.6% in 2017 to 30.7% in 2018.
• Global oilseeds stocks are up slightly on the back of higher
Source: Bloomberg. carryover from Brazil soybean stocks.
17Outlook On Potash
USD/Mt
500
400
300
200
Potash China CFR Potash Brazil CFR Potash Cornbelt granular Potash US Gulf NOLA
Potash Vancouver granular Potash India CFR Potash Saskatchewan granular
100
16-ספט 17-ספט 18-ספט
• 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.
Source: Bloomberg.
18Outlook On Phosphate
USD/Mt
600 700
500 600
500
400
400
300
300
200
DAP US Gulf NOLA DAP Cornbelt
200
MAP US Gulf NOLA MAP Brazil Bulk CFR
100 DAP Baltic DAP Benelux FCA 100
MAP Cornbelt MAP Eastern Canada
DAP Marroco
0 0
16-ספט 17-ספט 18-ספט 16-ספט 17-ספט 18-ספט
• 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%.
Source: Bloomberg. MAP = Monoammonium Phosphate (46% phosphate and 11% nitrogen); DAP = Diammonium Phosphate (46% phosphate and 18% nitrogen)
19Outlook On Nitrogen
USD/Mt
600 500
500
400
400
300
300
200
200
Urea Cornbelt granular Urea China granular
Ammonia Tampa Ammonia US Gulf NOLA 100
100 Ammonia Black Sea Ammonia Cornbelt
Urea India granular Urea US Gulf prill
Urea Middle East prill Urea Black Sea prill
Ammonia Western Europe CFR
0 0
16-ספט 17-פבר 17-יול 17-דצמ 18-מאי 18-אוק 19-מרץ 16-ספט 17-מרץ 17-ספט 18-מרץ 18-ספט 19-מרץ
• 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%.
Source: Bloomberg.
20Global Polyolefin Outlook
21Ethylene and Propylene
Ethylene and propylene will see a “cost push” due
to IMO 2020 related naphtha feedstock cost
pressures.
Global Ethylene Price $/mt Global Propylene Price
$/mt
1550 Forecasts 1400 Forecasts
1350
1200
1150
950 1000
750
800
550
350 600
2014 2016 2018 2020 2022 2024 2026 2028 2015 2017 2019 2021 2023 2025 2027 2029
US Asia Europe US Asia Europe
• 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
Source: S&P Global Platts Analytics
23There will be a cash cost increase in 2020 for
naphtha-based ethylene producers due to IMO,
with NGL-based regions seeing minimal
movement.
$2,000 $/mt Ethylene Production Cost Curves
$1,800
$1,600
$1,400 2014
$1,200
2018
$1,000
$800 2020
$600 Saudi
SE Asia
$400 Ethane NE Asia
Naphtha 2023
NWE Naphtha
$200 US Naphtha 2029
$0 Ethane
- 50 100 150 200 250
Cumulative Capacity (million mt/year)
Source: S&P Global Platts Analytics
24Ethylene capacity additions focused in strong
demand centers as well as low cost feedstock
regions.
Global Marginal Ethylene Global Ethylene Capacity
Capacity Additions Including Additions by Feedstock
12 Million mt Speculative
10
8 13%
4%
Ethane
1%
6 Naphtha
6% 42%
Propane
4
Butane
2 Other
34% CTO/MTO
0
2016 2018 2020 2022 2024 2026 2028
Middle East Europe Asia Source: S&P Global Platts Analytics
Americas Africa
25Global ethylene demand growth will be driven
by polyethylene and fiber grade MEG for PET
demand.
Ethylene Demand by Ethylene Demand by
Derivative - 2019 Derivative - 2029
2% 1%
5% 11% 5% 10%
7%
8%
11% 11%
63% 66%
PE MEG EDC PE MEG EDC
SM VAM Others SM VAM Others
Source: S&P Global Platts Analytics
26Ethylene overcapacity in coming years leads to
lower prices and down cycle before a sustained
recovery starts from 2024.
Incremental Ethylene Capacity, Global Ethylene Price
Production and Demand $/mt Forecasts
10 Million mt Changes 1550
90% 1350
8
Period of Bearish
1150 Prices
6 89%
950
4
88% 750
2
The current US
550 disconnect to disappear
0 87% once export terminals
2015 2017 2019 2021 2023 2025 2027 2029 350 are built
Capacity Production 2014 2016 2018 2020 2022 2024 2026 2028
Demand Utilization rate (%) US Asia Europe
Source: S&P Global Platts Analytics
27Regional spot ethylene margins. Asia & Europe
experience margin compression while US prices
reach export parity after 2023.
$/mt
$900
$800
$700
$600
$500
$400
$300
$200
$100
$-
US Ethane Asia Naphtha Euro Naphtha
Source: S&P Global Platts Analytics
28The 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.
Global Propylene Production Propylene Capacity Led by
by Technology Million mt Asia
Million mt
180
160
160
140
140
120
120
100
100
80
80
60 60
40 40
20 20
- 0
2014 2017 2020 2023 2026 2029 2014 2017 2020 2023 2026 2029
Americas Middle East
Cracker FCC
Europe Asia
PDH OCU & Others
Africa
Source: S&P Global Platts Analytics
29PDH 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.
% Global PDH and FCC Capacity Additions By
Propylene Operating Rates
95% Million mt Technology
6
90%
5
85%
4
80% 3
75% 2
1
70%
2014 2016 2018 2020 2022 2024 2026 2028 -
2016 2018 2020 2022 2024 2026 2028
FCC Propylene Operating rates
PDH Operating Rates FCC PDH Cracker CTO MTO MTP
Source: S&P Global Platts Analytics
30Global propylene demand growth driven by PP
and propylene oxide.
Propylene Demand by Propylene Demand by
Derivative - 2019 Derivative - 2029
5%
4% 5% 4%
3% 1% 3% 1%
7% 7%
7% 6%
68% 70%
4%
5%
PP Cumene ACN PP Cumene ACN
PO Acrylic Acid IPA PO Acrylic Acid IPA
2-EH Others 2-EH Others
Source: S&P Global Platts Analytics
31Propylene 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.
Incremental Propylene
Global Propylene Price
Capacity and Demand $/mt
1300 forecasts
Million mt Changes
7 90%
1200
6
5 1100
4 1000
85%
3
900
2
1 800
0 80%
2015 2017 2019 2021 2023 2025 2027 2029 700
Incremental Capacity Additions 600
2015 2017 2019 2021 2023 2025 2027 2029
YoY Demand Growth
Operating Rate (%) US Asia Europe
Source: S&P Global Platts Analytics
32Polyethylene and Polypropylene
Global virgin polyethylene demand growth
remains above GDP driven by strong Asian
petrochemical demand.
Global Polyethylene Demand Asia Ethylene Demand by
Growth vs GDP Growth Derivative
Million mt
% 100
6.0% 90
80
5.0%
70
4.0% 60
3.0% 50
40
2.0%
30
1.0% 20
0.0% 10
-
2014 2017 2020 2023 2026 2029
Global GDP Growth
PE MEG EDC SM VAM Other
Global Virgin PE Demand Growth
Source: S&P Global Platts Analytics
34PE 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.
Polyethylene Demand Per Capita (2018 – 2029)
10
9
Projected % CAGR (2018-2029)
8
7
6
5
4
3
2
1
0
0 5 10 15 20 25 30 35 40 45 50
Polyethylene consumption (2018), kg per capita
China Europe South America India Asia (Excluding China and India) USA
Source: S&P Global Platts Analytics
35Polyethylene 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.
Global PE Incremental Capacity and Demand Growth
9 Million mt 92%
8 90%
7 88%
6
86%
5
84%
4
82%
3
2 80%
1 78%
0 76%
2014 2016 2018 2020 2022 2024 2026 2028
Incremental Capacity Additions YoY Demand Growth
Utilization Rate (with spec cap) Utilization Rate (w/o spec cap)
Source: S&P Global Platts Analytics
36Overall, Middle East and the US will be key
polyethylene exporters.
Regional PE Net Trade • Shale based ethane expansions
Million mt in the US will result in its
40 emergence as a hub of HDPE
and LLDPE exports alongside the
30 Middle East
20 • Asia, in particular China will
continue to grow as the main
10 importing region due to strong
demand growth, despite capacity
0 additions
-10 • The Middle East will continue to
dominate exports to Asia, Africa
-20 and Europe
-30 • However, the US will have to
-40 compete with the Middle East for
exports into Asia and Europe
2013 2015 2017 2019 2021 2023 2025 2027 2029
• Current uncertainty remains due
Africa Asia to China-US trade war and 25%
Middle East Eastern Europe import tariffs for HDPE & LLDPE
Western Europe Central and South America
North America
Source: S&P Global Platts Analytics
37Regional spot HDPE integrated margins. All
regions experience margin compression into 2023
and Asia remains the high cost region.
$/mt
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
US Ethane Asia Naphtha Euro Naphtha
Source: S&P Global Platts Analytics
38Global PP capacity not as overbuilt as PE allowing for
higher run rates and better margins. PP op rates to quickly
improve post 2023.
Global PP Outlook Global PP Incremental
Million mt Capacity and Demand Growth
120 91%
5 Million mt 91%
100 90%
4 90%
80
89%
3 89%
60
88%
40 2 88%
20 87% 1 87%
0 86% 0 86%
2013 2016 2019 2022 2025 2028 2014 2017 2020 2023 2026 2029
Production
Capacity Incremental Capacity Additions
Demand YoY Demand Growth
O/R (with spec cap)
Utilization Rate (%)
Source: S&P Global Platts Analytics
39Global 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.
Global PP Price Forecasts Regional PDH integrated PP
$/mt $/mt margins
1,600
$1,000
1,500 Period of Bearish $900
Prices
1,400 $800
1,300 $700
1,200 $600
$500
1,100
$400
1,000
$300
900
2015 2017 2019 2021 2023 2025 2027 2029
US Asia Euro
Asia Europe US
• Regional PDH integrated polypropylene margins. Asia will
have increasing margins as new PP capacity is absorbed and
international propane prices remain depressed.
Source: S&P Global Platts Analytics 40Asia 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.
15 Million mt Regional PP Net Trade
10 • Asia to lead the way in terms
of import requirements
5 despite Chinese PDH/PP
capacity additions
0 • The Middle East will
maintain its position as the
-5 key global PP exporter
• Capacity additions in the
-10
USGC & Canada will see
North America emerge as a
-15 growing export region with
2013 2015 2017 2019 2021 2023 2025 2027 2029 PP flowing mainly South
America & Asia
Asia Middle East
Africa Eastern Europe
Western Europe Central and South America
Source: S&P Global Platts Analytics
41Recycling Trends
Virgin PET bottle demand growth will continue
but a greater percentage of the total PET bottle
supply will become RPET.
Global PET Bottle Demand RPET Percent in PET Bottles
45 25%
40
35 20%
30
Millions mt
25 15%
20
15 10%
10
5 5%
-
2012 2015 2018 2021 2024 2027 0%
RPET Bottles 2012 2015 2018 2021 2024 2027
Virgin PET Bottle Demand
Source: S&P Global Platts Analytics
43Our base case for increasing plastics recycling
from current level of 7% to 12% of demand
reduces feedstock usage by 650,000 bpd.
Global recycled PE, PP and PET Feedstock displaced from
recycling
50
700,000
45
40 600,000
35 500,000
Millions mt
30
400,000
BPD
25 PET
20 300,000 PP
15
10
200,000 PE
5 100,000
0
0
2019 2024 2029
2013
2015
2017
2019
2021
2023
2025
2027
2029
PE PP PET
*assumes that PE is made from ethane and that PP is produced via propane
dehydrogenation
44Recycled PE demand/supply will eat into Virgin
PE demand growth
Global Polyethylene Demand Growth vs GDP Growth
%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
-1.0%
Recycled % of Total Global PE Demand Growth
Global Virgin PE Demand Growth
Global GDP Growth
Source: S&P Global Platts Analytics
45Key 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.
46ESG In Credit Ratings
47ESG & Credit - Look Back Series
48ESG Factors In Our Rating Methodology
Credit FAQ: How Does S&P Global Ratings Incorporate
Environmental, Social, And Governance Risks Into Its
Ratings Analysis, Nov 21, 2017
49ESG Factors In Our Rating Methodology
German Potash Producer K+S : In the first quarter of 2017, prolonged low water levels in the Werra river led
to a 25-day outage, but thanks to waste disposal measures implemented by the company, no further
production days were lost in the second quarter. We believe that the production limitations in Germany
should significantly reduce in the second half of 2017, but uncertainty remains as capacity utilization
continues to depend on the Werra River's water levels.
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 reached
the objective of reducing its energy consumption by 3% per ton sold, which in 2018 amounted to 424
megajules (2017: 450 megajules). The reduction was achieved through a strategy to improve the energy
efficiency of production plants, which we view as positive because it translates into better profits for the
company.
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.
50Transparency in Corporate Credit Reports
As with peers, Syngenta can be subject to lawsuits, personal injury complaints, and
changing 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 authorities
through provision of data on the impact on human health and the environment, and
internal audits and self-reporting processes to ensure compliance with strict and
extensive regulatory standards. The company also supports growers in understanding
the correct use and application of its products via clear labels and market
communication.
Still, in late 2017, Syngenta reached a $1.5 billion settlement in relation to
commercialization of Viptera and Duracade insecticides. Litigation payments of such
magnitude can have an important impact on the company's finances, reputation, and
ultimately the rating.
We view governance as a neutral factor for the ratings, reflecting management's long
standing experience and expertise in the industry, balanced by our view of certain
limitations with regard to transparency and timeliness of communications with
investors.
51Questions?
Company Focus: Selected Issuers
53Portfolio Credits Overview – EMEA Chemicals
0
• Israel Chemical (BBB-/Stable)
• Linde Plc (A/Stable/A-1)
Minimal 1
• BASF (A/Stable/A-1) Akzo Nobel
• Akzo Nobel (BBB+/Stable/A-2) Modest
2
• DSM (A-/Stable/A-2) Yara DSM
International, Linde Plc
• L’Air Liquide (A-/Stable/A-2) Intermediate
3
Lanxess
Financial Risk Profile
BASF, Evonik Industries
• Evonik Industries (BBB+/Stable/A-2)
Solvay,
Significant Syngenta
• Solvay S.A. (BBB/Stable/A-2) 4
Israel Chemical L’Air Liquide
Ineos Group Holding
• Yara International (BBB/Stable/A-2)
OCI
Aggressive 5
• LANXESS (BBB/Stable/A-2)
• Syngenta (BBB-/Stable/A-3) Oxea
Highly 6
• Ineos Group Holdings (BB/Stable) Leveraged
• OCI N.V. (BB-/Stable)
7
• Oxea (B+/Stable) 7 6 5 4 3 2 1 0
Vulnerable Weak Fair Satisfactory Strong Excellent
Business Risk Profile
54Company Focus: Israel Chemical (BBB-/Stable)
Business Risk Key Strengths Key Risks
• One of the leading global potash producers and the largest • Cyclical and competitive nature of the fertilizer industry.
global bromine producer
Satisfactory • Exposure to regulatory changes and political pressure in
• Competitive advantage from mining in the Dead Sea, Israel pertaining to extending the Dead Sea mining
which provides access to unique, high-quality raw concession, which is valid until 2030.
Financial Risk materials; logistical advantages; proximity to ports; and a
more favorable cost position for potash and bromine than
peers.
Significant • A synergy between the manufacturing processes for
different specialty chemicals products that provide added
value.
Anchor
Stable Outlook
The stable outlook on Israel Chemicals Ltd. (ICL) reflects our expectation that ICL will maintain S&P Global Ratings-adjusted debt to
bbb- EBITDA of 3.0x-3.5x in the slowly recovering fertilizer pricing environment. Our expectation is based on the company's plan to
undertake 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 the
Outlook fertilizer markets and low production costs in Israel. We consider an adjusted debt-to-EBITDA ratio of 3.0x at the top of the
business cycle and 4.0x at the bottom of the cycle to be commensurate with the current rating. We also expect the company to
generate positive free cash flows over time.
Stable
Downside scenario
We would consider a negative rating action if the company's debt to EBITDA was close to 4.0x without near-term prospects of
recovery, and its operating performance deteriorated, contrary to our expectations. In our view, this scenario is possible if ICL
implements aggressive business or financial policies, whether by significantly deviating from its publicly stated dividend policy or
through sizable leveraged acquisitions. Further deterioration in market conditions that may hurt operating results could also lead
to a downgrade. In the medium term, the rating could come under pressure if uncertainty regarding the renewal of the Dead Sea
concession continues. In this scenario, we expect pressure on the company's business risk profile, which currently benefits from its
inherent advantages in the Dead Sea.
Upside scenario
We would consider a positive rating action if ICL strengthened its financial risk profile such that its adjusted debt to EBITDA
dropped below 2.5x on a sustainable basis.
55Company Focus: Linde Plc (A/Stable/A-1)
Business Risk Key Strengths Key Risks
• One of the largest global manufacturers in the credit- • Potential volatility in earnings driven by demand swings in its
Excellent supportive industrial gases industry. cylinder and bulk businesses.
• Strong geographic diversity, with significant exposure to • High capital expenditures (capex), potentially weighing on
Financial Risk high-growth markets. free cash flows.
• High and stable profit generation.
Intermediate
• Track record of strong credit metrics and conservative
Anchor financial policy, targeting less than 2.5x reported net debt
to EBITDA.
a+
Stable Outlook
Modifier The stable outlook reflects our view of the combined entity's resilient business and its commitment to balance growth investments
and 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 per
Financial policy : year. This results in meaningful headroom under the rating in 2019-2020 given our forecast of adjusted FFO to debt at the higher
Negative (-1 notch) end of the 35%-40% range.
Outlook Downside scenario
We 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
Stable the company's announcement to allow this to occur.
Upside scenario
A 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.
56Company Focus: BASF (A/Stable/A-1)
Business Risk Key Strengths Key Risks
• The world's leading integrated chemicals producer, with an • Cyclicality of the chemicals industry, notably of the
Strong expanding presence in Asia and North America. commodity chemicals segments, with its significant exposure
to the automotive sector
• "Verbund" integrated strategy that offers cost savings
Financial Risk through logistics, energy, and infrastructure advantages. • High post-retirement obligations.
• Diversification benefits of producing commodity and • Historically high shareholder payouts, which have reduced
Intermediate specialty chemicals, complemented by a significant share financial flexibility.
of agrochemicals.
Anchor
• Solid profitability and high free cash flow generation.
a- • Moderate financial debt.
Modifier Stable Outlook
The stable outlook reflects our view of BASF's diversity and resilience. Its business comprises a substantial share of less volatile
specialty chemicals, which should enable it to maintain FFO to debt around 35% over the next couple of years, balancing its
CRA: Positive exposure to more cyclical end-markets such as the automotive sector. We believe that the company's leeway for bolt-on
(+1 Notch) acquisitions at the current rating level is reduced though following the recent series of acquisitions and due to potential slower
GDP growth in North America and Europe, increased environmental concerns and softening demand in key end markets such as
Outlook the automotive industry.
Downside scenario
Stable We could downgrade BASF if it made a significant debt-financed acquisition, or there was a major global slowdown leading to
materially 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 scenario
We could raise the rating if the company improves its adjusted FFO-to-debt ratio sustainably above 45% as a result of stronger
EBITDA generation and better free operating cash flow (FOCF). This would likely hinge on a much stronger global macroeconomic
environment than we currently expect and an improved supply-demand balance in commodity chemicals.
57Company Focus: Akzo Nobel (BBB+/Stable/A-2)
Business Risk Key Strengths Key Risks
• A leading global producer of decorative paints and • Lower profitability than main competitors and reduced size
Satisfactory coatings. and scope following the sale of the higher-margin specialty
• Strong brand recognition and solid long-lasting chemicals business.
relationships with clients. • Demand for key products mirrors GDP trends, partly offset by
Financial Risk • Sizable, well-diversified operations by country and market exposure to the renovation market in the decorative paints
including in higher-growth emerging and Asian markets. segment.
• Healthy balance sheet, strong liquidity, and ample rating • Potential for margin squeeze from raw materials costs and
Minimal headroom. pricing constraints from end markets.
• Track record of prudent risk management and low • Top and bottom line results exposed to foreign exchange
leverage, given no adjusted debt at present. volatility, especially in high-inflation regions.
Anchor
Stable Outlook
a The stable outlook reflects our view that Akzo's focus on operating efficiencies and cost pass-through will support the growth in its
adjusted 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 from
Modifier operations (FFO) to debt of about 45%-60% as commensurate with the 'BBB+' rating.
Downside scenario
Financial Policy: We see a downgrade as unlikely, reflecting generous headroom in the rating. However, we could lower the rating if Akzo's growth
strategy results in sizable, debt-financed acquisitions, even though we would weigh such a transaction against the corresponding
Negative (-2 Notch) benefits to the business.
Higher-than-anticipated dividends, share buybacks, or a marked deterioration in the operating performance resulting in a
Outlook sustained FFO to debt ratio below 45% could also lead to a negative rating action.
Stable Upside scenario
We could raise the rating on Akzo if its financial policy supported a higher rating, notably through the commitment to prudent
outlays for acquisitions and shareholder remunerations, and adherence to an adjusted FFO-to-debt ratio of at least 60%. A revision
of our assessment of Akzo's business, for example if it were to clearly and sustainably narrow the profitability gap with peers, could
also lead to a positive rating action.
58Company Focus: DSM (A-/Stable/A-2)
Business Risk Key Strengths Key Risks
• Leading market positions in a wide range of nutritional • Potentially material fluctuations in EBITDA generated by its
products including vitamins, carotenoids, lipids, and feed polyamide-based engineering plastics and high-
Strong enzymes. performance resins business.
• Broad product, end-market, and geographic diversity. • Competition from Chinese producers of vitamins (notably
Financial Risk vitamins E and C).
• Robust R&D and technological capabilities.
• Sizable cash outlays to cover shareholder remuneration and
Modest • Strong free operating cash flow generation . share buybacks.
• Exceptional liquidity and considerable headroom under • Lack of management’s commitment towards maintaining
the current rating. financial policy commensurate with a higher rating.
Anchor
Stable Outlook
A The stable outlook reflects our view that Dutch chemicals company Koninklijke DSM N.V. (DSM) will report resilient operating
performance 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 commensurate
Modifier with the 'A-' rating and believe that the company has considerable rating headroom.
Downside scenario
Financial Policy: We see the likelihood of a downgrade as low, reflecting strong headroom in the rating. However, we could lower the rating if
DSM's FFO to debt declined below 35%, for example if DSM's nutrition segment margins weakened as a result of increased
Negative (-1 notch) competition, or if the benefits of the operational efficiency program were not sustainable. Similarly, a weaker financial policy
commitment, demonstrated, for example, by a combination of higher-than-anticipated acquisitions, dividends, or share
buybacks, could also prompt a negative rating action.
Upside scenario
Outlook We 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
Stable FFO-to-debt ratio was maintained, and if management committed to higher credit metrics.
59Company Focus: L’Air Liquide (A-/Stable/A-2)
Business Risk Key Strengths Key Risks
• Leading global player in the industrial gases sector with • An acquisitive track record including continued bolt-ons and
supportive market fundamentals and favorable growth potential larger acquisitions translating into temporary
Excellent prospects. leverage increases.
• Superior resilience of activity and profitability, benefiting
• Fairly high capital expenditures, including for significant
from long-term contracts, off-take volumes, and energy
growth projects, notably in Asia and emerging markets
Financial Risk pass-through clauses.
• High profitability, with EBITDA margins of 25%-26%, and a • A shareholder-friendly, but very stable, dividend policy.
track record of achieving efficiency targets and realizing
Significant synergies. • Marginal variability in top-line growth linked to regional
macroeconomic changes, modest cyclicality of some markets,
• Prudent and disciplined financial policy, strongly and currency exposures.
committed to the 'A' category.
Anchor
Stable Outlook
a- The stable outlook on France-based industrial gas supplier L'Air Liquide S.A. reflects S&P Global Ratings‘ expectation that the
company will report overall resilient performance and strong free operating cash flow generation that should allow FFO to debt to
remain at about 25% in 2018 and exceed that level in 2019. This assumes Airgas synergies staying well on track, and sustained
activity supported by a high level of industrial production, despite marginal currency exposure. We also acknowledge
Outlook management's disciplined financial policy and commitment to maintain a rating level of at least 'A-'.
Downside scenario
We could raise the rating if market growth and operating margins stay resilient, such that FFO to debt approaches 30% on a
Stable sustainable basis, and management remains committed to balancing investments and shareholder returns to maintain that ratio
level.
Upside scenario
Although unlikely in the near term, given the current comfortable rating headroom, we could lower the rating if weaker operating
performance or further mergers and acquisitions kept the FFO-to-debt ratios significantly below 25% for a prolonged period.
60Company Focus: Evonik Industries (BBB+/Stable/A-2)
Business Risk Key Strengths Key Risks
• Stronger-than-peers' end-market diversification, with • Some concentration risk in the product portfolio that could
a high share of sales from the nutrition and health lead to more-volatile profit generation, notwithstanding
Strong care industry, as well as resource-efficient solutions. strategy to further increase the share of specialty chemical
• Average but resilient profitability overall, with products.
potential improvement over the medium term thanks • Cyclicality of chemical activities and exposure to
Financial Risk to cost saving initiatives. • volatile raw material prices.
• Our expectation of ongoing positive free cash flow • Significant postretirement obligations.
generation based on moderate capex and working
capital.
Intermediate • Supportive financial policy and management's
commitment to a solid investment-grade rating, most
recently demonstrated by issuance of a hybrid to
Anchor support an acquisition.
• Strong liquidity.
bbb+ 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
Outlook 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.
Stable Downside scenario
We 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 scenario
Upside 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.
61Company Focus: Solvay S.A. (BBB/Stable/A-2)
Business Risk Key Strengths Key Risks
• Top-tier market positions for products representing 90% of • Exposure to GDP swings and various cyclical end markets,
Solvay's revenue. such as construction and automobile.
Strong
• Favorable portfolio repositioning after strategic • Relatively high sensitivity of pension deficits to discount
acquisitions and the divestments of noncore businesses. rates.
Financial Risk
• Strong liquidity and a supportive debt amortization profile.
Significant
Anchor 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 we
view as commensurate with the current 'BBB' rating. We also forecast that Solvay will generate adjusted free operating cash flow
bbb (FOCF) of €400 million to €500 million in 2019 and factor in the sale of its integrated polyamides business for cash proceeds of €1.1
billion by year-end. We expect the company's FFO to debt will strengthen, reaching 30% in 2019 and more than 30% in 2020.
Outlook Downside scenario
A deterioration of adjusted FFO to debt significantly below 25% without the prospect of an immediate recovery could put pressure
Stable 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 upside
would also depend on the company's financial policy and management's commitment to maintain this higher ratio.
62Company Focus: Yara International (BBB/Stable/A-2)
Business Risk Key Strengths Key Risks
• World's largest distributor of fertilizer by volume, with • Profits anchored in the highly cyclical nitrogen fertilizer
good geographic diversity. industry.
Satisfactory • Joint ventures in low-cost gas areas and large-scale • Exposure to volatile--and currently increasing--European gas
efficient production facilities. prices.
• Higher-margin specialty fertilizers that are a large • Cash flow swings reflecting cyclicality of the fertilizer
Financial Risk contributor to profits. industry.
• Capital intensity and long lead time to add or expand
capacity.
Intermediate
Stable Outlook
Anchor The stable outlook on Yara reflects our view that it will maintain adjusted FFO to debt of about 30%-45% through the cycle, which
we 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;
bbb and recovery in prices of fertilizers from the bottom of the cycle conditions seen in 2016-2017.
Downside scenario
We could lower the rating if Yara's adjusted FFO-to-debt ratio declined below 30%. This could occur, in our view, if Yara's margins
Outlook declined 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.
Stable Upside scenario
Over time, upside potential could emerge and would depend on our confidence that Yara was able to sustain adjusted FFO to debt
of more than 45% through the cycle, and that the company's financial policy and growth strategy would support a higher rating.
63Company Focus: LANXESS (BBB/Stable/A-2)
Business Risk Key Strengths Key Risks
• Portfolio realignment (including exiting commodity • Debt-funded acquisitions related to the business-portfolio
chemicals) expected to result in higher, less volatile realignment strategy.
Satisfactory margins. • Operating margins are improving, but still lag investment-
• Solid market position among the top three players in niche grade specialty chemical peers' 17% average.
and midsize specialty chemicals business. • Exposure to some cyclical end markets and volatile raw
Financial Risk • Well-diversified exposure by geography and end markets, material prices.
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.
Intermediate • Public commitment to maintaining a solid investment-
grade rating.
Anchor Stable Outlook
The stable outlook reflects our expectation that, following the disposal of ARLANXEO, LANXESS will keep its FFO-to-debt ratio
comfortably above 30%, which we consider commensurate with a 'BBB' rating.
bbb 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, indicating
some headroom to absorb moderate business underperformance, higher capex, or small debt-financed acquisitions. We also
expect the adjusted EBITDA margin will improve by up to 200 basis points (bps) in 2018 and 2019 to about 15%, thanks to the
integration of Chemtura and related synergies, as well as various debottlenecking and manufacturing efficiency projects. At the
Outlook same time, we forecast free operating cash flow (FOCF) to debt slightly below 10% in 2018, and at about 15% in 2019-2020.
Downside scenario
We 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,
Stable this may happen if LANXESS pursued a large debt-financed acquisition in excess of €1 billion, which we see as the main risk to the
rating. However, we believe that, in such a scenario, the group would likely manage to protect its credit metrics in light of its
commitment to maintain a solid investment-grade rating. Prolonged operating pressure associated with a significant reduction of
our adjusted EBITDA margin to below 13%, or inability to dispose of ARLANXEO, could also lead to a downgrade.
Upside scenario
We could consider an upgrade if LANXESS improved its credit metrics, specifically with FFO to debt comfortably exceeding 45% and
FOCF to debt above 25% on a sustained basis. However, we view such a scenario as unlikely, since we believe that the company
would most likely use any financial flexibility it gained to increase capex, acquisitions, or shareholder returns.
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