INSIGHT: Some US chems have started layoffs, defaulting

HOUSTON (ICIS)–Higher interest rates and weaker demand have led to shutdowns, layoffs and a couple of distressed debt exchanges that were considered defaults by ratings agencies.

• Nylon producer Ascend Performance Materials is closing a plant and laying off workers at another site.
• Cornerstone and SI Group held distressed debt exchanges.
• Mid-2025 recovery could be delayed if US mortgage rates remain elevated due to growing government debt.

ASCEND SUMS UP CHALLENGES FOR CHEMS
Ascend’s nylon 6,6 business is contending with a troubling mix of rising supplies in polyamides and weak demand from its key end markets of consumer goods, automobiles and housing.

ICIS keeps track of global capacity for nylon 6 and nylon 6,6. By 2027, capacity should be nearly 70% larger than levels in 2022. Nearly all of the new capacity is being built in northeast Asia, which includes China.

Another company, US-based paints and coatings producer PPG, is planning possible shutdowns and layoffs, but these will be primarily in Europe and certain other global businesses.

DISTRESSED DEBT EXCHANGES FROM SI GROUP, CORNERSTONE
SI Group is expected to complete what a ratings agency considers to be another distressed debt exchange, which would lead to the company’s second restricted default this year. SI declined to comment when the ratings note was issued in September.

SI Group is facing the same difficult business conditions as Ascend, according to Fitch Ratings. Sales fell amid new capacity in China.

SI Group makes specialty chemicals used in coatings, adhesives, sealants and elastomers (CASE) as well as in lubricants, fuels, surfactants and polymers.

Cornerstone, the sole melamine producer in the US, is trying to sell some of its assets to avoid a second default. The company also makes acrylonitrile (ACN).

Demand fell for both products fell, leading to large operating losses in 2023.

COMPANIES HOLD OUT FOR SECOND HALF RECOVERY
The chemical industry is hopeful that falling inflation and interest rates will lead to a recovery in demand in 2025.

“It is only a question of when, not if,” said Heidi Petz, CEO of Sherwin-Williams, a US-based paints and coatings producer.

Polyurethane producers expect a recovery could start in mid-2025, coinciding with the start of the US construction season and the cumulative effects of what it expects to be subsequent declines in interest rates.

Lower mortgage rates would make housing more affordable, which would increase sales of new and existing homes. That would increase demand for furniture and appliances as well as for chemicals used to make paints, coatings, sealants and insulation.

Lower interest rates would also make automobiles more affordable. The industry is suffering from a temporary lull, with PPG noting that original equipment manufacturers (OEMs) started taking unscheduled and prolonged downtime in Q3.

The decline in interest rates will depend, in part, on US inflation remaining on track to reach the central bank’s target of 2%.

The danger is that inflation remains stubborn or, if it does fall, the lower benchmark interest rate does not fully translate into declines in longer term rates like US home loans.

US home loans typically rise and fall with yields on 10-year Treasury notes, and an economist has warned that yields could remain elevated because of the growing US debt.

The International Monetary Fund (IMF) also warned about the consequences of growing government debt.

If the link between longer term rates and government debt holds true, then that could limit or delay the recovery in demand expected by many chemical companies that sell materials used in durable goods.

Insight by Al Greenwood