Economic Woes Go International

BETWEEN RECORD DROPS in stock markets throughout Europe and a spread of the U.S. credit freeze, it looks increasingly likely that European chemical companies will be affected by the financial sector's woes. The question is when; to date, evidence of problems has not yet emerged.

That's because of the industry's overall strength during the past several years, analysts suggest. The good years have enabled companies to build cash reserves and lower debt levels, thereby avoiding the direct effects of the financial turmoil.

For the most part "chemical companies have a strong position," says Tobias Mock, director for corporate ratings in the Frankfurt offices of credit rating agency Standard & Poor's. "Banks need regular refinancing on a weekly basis, whereas corporations have a much longer refinancing strategy and significant cash flow."

Those companies with debt that is maturing, Mock says, will face refinancing challenges. "But companies may not be willing to pay the high refinancing costs right now," he predicts. "They will take their time, while drawing down their backup credit."

Cash management becomes the key, Mock says. A case in point is the Dutch chemicals giant AkzoNobel, which has $2.6 billion of bonds due to mature in the next eight months. The company recently opted to defer a stock buyback program in order to keep cash on hand while it refinances or redeems the bonds.

Economists at the German Chemical Industry Association note the crisis' indirect effect on demand for its products as credit constraints hit customers around the world. Citing the U.S. situation, the association recently forecast 2008 German chemical production growth of only 1.0%, down from the 2.5% forecast as recently as July.

Consultant Peter Pollak says the main challenges for the European fine chemicals industry that he follows are the stall in new drug approvals and competitive pressure from Chinese and Indian players. "In comparison with these challenges, I consider the impact of the economic crisis as minor," Pollak says.