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Merrill Lynch Downgrades Three Chemical Companies

Merrill Lynch downgraded Millennium Chemicals (MCH), NOVA Chemicals (NCX), and Lyondell Chemical (LYO) to sell from neutral.

Analyst Eric Serotta says the shares of each company are up 27% to 32% from March lows amidst expectations of sharp improvement in profitability from a post-war economic rebound and energy price decline. He expects the shares to trade lower in the near term as second-quarter earnings improve less than expected owing to weak volumes, rebounding hydrocarbon costs, and declining polyethylene prices.

While the rise in hydrocarbon costs could prevent a collapse in commodity petrochemical prices, he thinks margins will be squeezed either way. But Serotta says he thinks the companies have the liquidity to weather a downturn.

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