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Chemical industry outlook negative as demand remains weak

The outlook for the chemical industry globally continues to be negative, says Moody's Investors Service in a six-month update on the industry.

The negative outlook largely reflects Moody's expectations for limited volume growth, excess industry capacity and concern that raw material prices may increase prior to meaningful
increases in demand, threatening performance.

“Although there has been a rebound in the last two quarters, producers continue to see limited future chemical demand, and we expect pressure on Q4 2009 results as downstream industries minimize their
inventories towards year-end,” said James Wilkins, Moody's vice president and senior analyst. “This will mute the improvement from the distressed demand levels of 2008.”

Commodity prices, which were low in late 2008 to the benefit of the chemical companies, have partially rebounded. Moody's says strong demand growth in Asia could put more pressure on global commodity prices before demand in the US and Europe fully recovers, keeping margins tight in 2010.

Low capacity utilization rates and weak selling prices could also squeeze producers' margins and cash flows over the near term, says Moody's.

Rebounding some, chemical production should track forecast growth in industrial production in Europe and the US in 2010.

Industrial production, a key to chemical demand, must recover for the chemical industry to recover, says Moody's.

“Any unanticipated event that stalls the recovery in industrial production will likely have a significant impact on most chemical companies,” Wilkins said. “Also, the weak demand and modest recovery
will not give chemical companies much opportunity to pass through raw-material cost increases.”

Industry outlooks express Moody's expectations for the fundamental credit conditions in an industry over the next 12 to 18 months. (Moody's Investor Service)