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On Thursday, Morgan Stanley upgraded Wacker Chemie AG (WCH:GR) (OTC: WKCMF) stock from Equalweight to Overweight, while reducing the price target to €113.00 from the previous €128.00. The adjustment reflects a reassessment of the company's prospects amid recent challenges and future market opportunities.
Wacker Chemie has faced production issues in the United States and the effects of anti-dumping/countervailing duties (AD/CVD) imposed by the U.S. on Southeast Asian solar producers. These factors contributed to a weaker-than-expected free cash flow (FCF) as the company reported an increase in polysilicon inventory during the second quarter. The same trend is anticipated to persist into the third quarter.
Despite these short-term obstacles, Morgan Stanley foresees a positive outlook for Wacker Chemie in the coming years. The firm anticipates that the incentives for domestic U.S. solar markets under the Inflation Reduction Act (IRA) will lead to capacity expansions, which should absorb Wacker's surplus polysilicon at higher international prices.
The market for silicone, a significant segment for Wacker Chemie, is expected to move toward equilibrium after experiencing a period of over-supply in commodity grades. This imbalance has pressured the margins of Wacker's specialty grade business, which produces commodity grade materials as a by-product.
As the market stabilizes, Morgan Stanley predicts an improvement in profitability for Wacker Chemie, particularly highlighting the quality of their semiconductor polysilicon business and the potential for reduced volatility in earnings.
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