No reprieve for battle weary firms

24 January 1994 00:00  [Source: ICB]

With yet more disappointing profits forecast for the end of year results, chemical companies are pinning their hopes on 1994, which most analysts agree should see modest improvements - although these will be mainly due to cost-cutting measures.

By Dermot O'Connor

THE MAJORITY OF Europe's leading chemicals firms, those in continental Europe especially, are facing sharp declines in profit for 1993 as the full impact of lower prices, overcapacity, currency fluctuations and the cost of restructuring measures are felt. Analysts agree that full-year figures are likely to reflect the fall in profits noted at nine months, though a year-on-year improvement can be expected in Q4 results.

Michael Stone, chemicals analyst with SG Warburg Securities in London, said forecasts of year-on-year improvements in Q4 1993 could be explained by the ERM devaluation in mid-September 1992 when hard currency companies' in Germany, Belgium and the Netherlands were forced to cut prices to match those enjoyed by the UK, Italy and Spain. However, the 1992 figures also reflect weaker demand, for example from the automotive and textiles industries.

The outlook for 1994 is somewhat more favourable, with forecasts of slight to modest improvement in the economic climate, at least in the latter half of the year.

Petra Zamagna, analyst with Deutsche Bank Research in Frankfurt, feels that results will be 'slowly and successively better... but there will be no big steps because of the economy'.

She predicts the economies in the US and the UK will continue to improve in 1994, while recession in Germany, France and southern Europe has 'bottomed out' and Japan has 'the worst behind it'. 'Worldwide, things are moving uphill,' she said, adding that any improvement will be due mainly to the effects of cost-cutting measures in the absence of any worthwhile price gains.

London analyst Charles Lambert of Smith New Court agrees: 'It will be very hard in what is generally a dis-inflating climate to raise prices, especially in view of the overcapacities. 1994 will be another tough year... a year of modest growth.' Lambert predicts annual worldwide growth will be under 2% and any recovery in Europe will come late in the year. For Europe he forecast GDP growth rates ranking from 0.5% in France to 1% in Germany and 3% in the UK. He said the US economy should expand by about 3% in 1994 while Japan, which had zero growth in 1993, should be down slightly year-on-year.

There is consensus that European chemicals companies will continue their cost-cutting programmes in 1994, though at a much reduced rate.

According to Lambert of Smith New Court, further job cuts are in store in 1994, though 'on balance somewhat less than 1993'.

Petrochemicals face another difficult year, not helped by the failure of the APPE initiative. Lambert sees the petrochemical industry facing more jvs, more assets swaps, particularly in Europe, and certainly further closures. '1994 won't go any way towards solving the problems facing the industry,' he added.

Jackie Ashurst, analyst with James Capel in London, believes fibres will continue to be structurally very weak long-term due to persistent pressure from Far Eastern producers. An add-on effect can been seen in fibre intermediates, which are feeling the effects of competition from eastern Europe.

Stone of Warburg feels there is some scope in the plastics industry for price increases in the latter half of the year.

1994 will not bring any relief for the pharmaceutical industry, once a big earner for chemicals firms and for the past two years facing more and more problems. According to Zamagna of Deutsche Bank Research, further price reductions are unavoidable as the industry continues to come under pressure from national healthcare reform programmes, especially in Germany and the US. The answers to the industry's problems would appear to lie in further cost reductions and new product outflow.

European agrochemicals seem destined for more of the same in 1994 as demand for fertilisers in particular continues to be low in a Europe still in the midst of the EU land set-asides. Analysts say firms will seek further cost reduction measures and mergers in a bid to improve results.

1993 forecasts for the US chemicals firms vary: New York analyst Paul Raman of SG Warburg believes full year results should be 'slightly up' as the effects of cost control measures are felt. For 1994, he predicts continued improvement with volume growth about 2% above GDP, which is estimated at 2.5%.

Raman feels PE and PVC in particular should do very well, the latter because of its exposure to the housing market.

John Roberts of Merrill Lynch sees 1993 results, excluding exceptionals, 'flat on average but with a variable span'.

'US downstream businesses will show a modest recovery for 1993 while upstream businesses will be flat at trough levels,' he added.

Leslie Ravitz of Morgan Stanley believes profitability in bulk plastics will remain depressed with 'no return to better pricing until 1996'.

Predictions for agrochemicals in the US vary but there is consensus that significant improvement is in store.

'1994 will be a good year for agrochemicals,' according to Ravitz. He forecasts a sharp increase in demand in the US for crop protection chemicals and fertilisers as more acreage is cultivated.

European major's full-year net profit estimates
	1992(a)	1993(e)	Change, %	1994(e)
BASF (DMm)	1239 *	770 *	(37.9)	1000 *
Bayer (DMm)	2693 *	2100 *	(22.0)	2300 *
Hoechst (DMm)	2108 *	1350 *	(36.0)	1700 *
ICI (£m)	155	230	48.4	450
Elf Aquitaine (FFm)	5762	1000	(82.7)	5790
Rhône-Poulenc (FFm)	1516	970	(36.0)	-
Total(FFm)	3648	4325	18.6	5122
Ciba (SFm)	1800	1850	2.8	1950
Akzo (Dflm)	712	660	(7.3)	715
DSM (Dflm)	246	(40)	-	120
Solvay (BFm)	8663	(1000)	-	5000
Norsk Hydro (NKrm)	1763	1480	(16.0)	2465
Enichem (Lirabn)	19.4	30	54.6	37
Montedison (Lirabn)	(1744)	(1000)	42.7	(1000)
a: actual e: estimate *: pre-tax profit
Source: BNP Securities

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