Fitch: U.S. Chemical Industry Looks to Weak Recovery In Demand.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 11, 2003

While conditions in the U.S. chemical industry portend a weak future, Fitch Ratings expects some strengthening of margins and stable ratings as weakened fundamentals due to excess oversupply continues to be addressed by domestic chemical producers, according to an outlook and review of the sector published today by the rating agency. Fitch has published several 2004 outlooks concerning various industries as well as other fixed-income sectors.

Industry leaders, such as Dow Chemical and Nova Chemical, continue to remove inefficient high cost production capacity in the face of growing competition from foreign producers offering cheaper alternatives in the U.S.

The downward slide of the past few years should abate in 2004, but prices are not expected to strengthen until the economic cycle turns for the economy as a whole, most likely not until 2005. Therefore, Fitch's credit outlook for the U.S. chemical industry for the coming year is stable with a modest improvement forecast. Barring major changes or consolidations, downward rating moves will depend on specific producers' ability to manage liquidity and minimize cash burn until improvement in demand and margin expansion materializes. Most chemical companies are highly leveraged due to increases in debt during the prolonged cyclical trough; therefore significant debt repayment and improved credit profiles are not expected at least until 2005 for lower rated companies.

The oversupply is the result of a building campaign undertaken in the 1990s to meet demand that never materialized. North American ethylene operating rates averaged 81% in 2002, its lowest point since the recession in early 1992. In 2003 operating rates have improved in the third quarter however the industry's primary challenge in the coming years is to continue to control or otherwise rationalize its production capacity. Certain U.S. plants are scheduled to permanently go off line within the next two years, but others may be idled in the short-term to maintain a sensible supply in the face of dwindling local demand and tough foreign competition.

The picture for small U.S.-based chemical companies darkens even more in the next two years as multi-national companies look to add cheaper capacity overseas, most likely in the Middle East and South America. Domestic natural gas prices will likely stay high hurting the small producer even more. Foreign and multi-national competitors are building capacity in the Middle East to be near cheap abundant sources of natural gas, which is a major building block of their products.

In contrast, specialty chemical and metals companies such as Engelhard can expect continued strong operating results. Fitch expects Engelhard's credit statistics to remain solid and at some point, the company may take advantage of its strong financial position in the form of acquisitions. Engelhard boasts a strong market position as a global supplier of catalysts and technology-based performance products, is committed to cutting debt, and shows a strong potential for earnings growth through new products.

The outlook 'U.S. Chemical Industry Looks to Weak Recovery In Demand' can be found on Fitch's web site at 'www.fitchratings.com' by linking to the 'Corporate Finance' sector, clicking on 'Corporates' and then 'Special Reports'. Fitch will be maintaining a web page with a full list of 2004 outlook pieces that will be readily available on 'www.fitchratings.com'.