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Report: Energy Recovery Should Boost Chemical Companies

A new analysis suggests that chemical companies in North America should benefit from rising prices in the energy sector.

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A new analysis suggests that chemical companies in North America should benefit from rising prices in the energy sector.

The report from Fitch Ratings said that "modest reflation" in oil and natural gas — which are used as feedstock materials for chemical production — should bolster prices for petrochemicals, plastics and other materials.

Producers, in turn, should see higher sales, earnings and cash flow as a result.

The research firm noted that commodity chemicals including ethylene, propylene and methanol recovered late this year after they were hurt by low crude oil prices in 2015.

Prices for downstream chemicals polyethylene and polypropylene, meanwhile, should be stronger due to robust plastics demand.

Broader economic trends, such as recoveries in consumer spending and the construction sector, should also help chemical manufacturers, and analysts projected that the strength of the dollar should not hurt the segment as much next year.

Crackdowns on international trade, however, could prove challenging to U.S. chemical producers.

Fitch Ratings predicted an increase in merger and acquisition activity in the sector as diversified manufacturers and chemical producers alike spin off other operations.

The agricultural chemical segment — already in the midst of a wave of consolidation — should continue to experience pricing pressures as farm productivity outpaces food demand.

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