01 April 1998 00:00 [Source: PCE]"To become really competitive, European chemical companies have to face up to challenges bigger than strong currencies in their home markets"
Two or three years ago when they reported their performance to shareholders, employees, and other stakeholders, Swiss and German companies concentrated on their 'results in local currencies', which generally showed positive movements in sales and profits, rather than the figures expressed in Swiss francs or deutchmarks, which more often than not presented a less rosy picture. The problem was, they explained, that for an international business with a high proportion of overseas sales, the persistently strong currency would under-represent their performance in world markets.
These days the problem, if indeed it should be regarded as such, is emphasised by UK chemical companies, who are virtually without exception bemoaning the relative strength of sterling. Recently reporting good sets of results, Zeneca, Laporte and Inspec all stressed the strength of sterling as a problem, particularly in the impact it has on the performance of overseas sales on reported revenues and profits.
The latest to join the chorus of complaints is Croda. The speciality chemicals group reported that its pre-tax profits in 1997 fell some 10% to just over £41m ($68.4m).
On a constant currency basis, however, the figure would have been just under £10m higher, and 10% up on the 1996 level, Croda said. The group, which makes 67% of its sales overseas and had export sales of £129m from the UK, was hit by reduced export margins as well as the translation effect on foreign earnings. Turnover was down around 4% at actual currency rates to £429.1m.
This is a serious discrepancy. The difference between a 10% fall in profits and a 10% rise is significant, particularly when you are a young trader/analyst based in a City finance house and do not really understand the speciality chemicals business.
The high value of sterling and some other European currencies comes at a bad time for the European chemical industry. The economic problems in Asia have proved to be a double-edged sword - not only has demand from that region fallen rapidly, but their lower currencies have made product from Asia much cheaper and much more competitive that European firms'.
Croda's sales in Southeast Asia, for example, have been 'dramatically slowed' by the economic turmoil in some countries, said chairman Michael Valentine, although the year so far had started well in the Americas and Europe.
With increased competition across the board, tough decisions need to be made. Simon de Bree, chairman of DSM, of the Netherlands, said recently that the European chemical industry is at a crossroads. 'Despite our strengths, we face problems. In productivity and profitability, for example, the US chemical industry outperforms us,' he said.
'We are in the middle of the restructuring process and this is far from completed. There are still too many chemical players in the market and there are still many facilities which are too old or too small for world competition.'
The European chemical industry has a strong position in the world. However, it does not perform as a world leader should. It is lagging behind in profitability and productivity due to higher energy and labour costs in Europe. These also discourage investment in the essential updating and replacement of capacity.
To become really competitive, European chemical companies have to face up to challenges bigger than strong currencies in their home markets.
Alan Tyler, editor
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