ML warns on ethylene peak again, cuts '04 projections

04 September 2003 17:58  [Source: ICIS news]

HOUSTON (CNI)--Analysts at Merrill Lynch (ML) lowered their 2004 earnings projections Thursday for key North American ethylene producers and further delayed their prediction of a new peak for demand to 2006 or 2007.

In his report on the chemical industry, ML's Don Carson said: "While the Street consensus calls for an imminent rebound in ethylene chain profitability and a 2005 peak, we do not expect earnings to significantly recover until 2005 with a peak unlikely until 2006-2007."

Unlike previous downturns where domestic supply additions squeezed profits, Carson noted that a collapse in demand instead has driven this cycle's trough.

Although he still anticipates some degree of economic recovery soon, Carson warned: "The US ethylene derivatives export position has been permanently impaired by the step-change in natural gas prices and the build-up of low-cost export-oriented capacity in the Middle East."

In addition, Carson said: "We see only a narrow window for peak margins to be achieved in 2006-2007 given the substantial capacity increases planned in the Middle East and Asia for 2005 and 2007."

Carson has lowered his projections on 2004 earnings for Lyondell to a loss of 25 cent/share from previous expectations of a $1/share profit. He also cut next year's earnings/share (eps) expectations for Millennium to 40 cents from $1.50 and reduced Canada's Nova Chemicals to 50 cents from $1.50.

He said his projection for Dow Chemical remains unchanged at $1.75/share. Regarding Dow during the 2006-2007 cycle, however, Carson said: "We forecast peak eps of about $4.50 versus market and company forecasts of over $6."

For Lyondell, Carson expects a peak eps of $3.50 with $3.30 for Millennium and $5 for Nova.

Near-term, Carson said he also is increasing estimates of third quarter eps losses for Lyondell, Millennium and Nova to 40 cents, 25 cents and 45 cents respectively from previous projections of 30 cents, 13 cents and 10 cents respectively.

Citing the impact of the Equistar joint venture on partners Lyondell and Millennium, Carson said: "While the Equistar ethylene and derivatives partnership did not fully benefit from its petroleum liquid feedstock advantage last quarter because of a planned maintenance turnaround, results should deteriorate this quarter as the liquids advantage narrowed further during July and August."

The analyst warned that he now expects the major ethylene producers to report unit cash margins for the next peak at lower levels than the peak years of 1994-1995.

But Carson also softened his projections a bit, noting: "Unlike some alarmists, we don't see the ethylene industry going the way of the US nitrogen fertiliser industry, which imports 45% of its needs from producers in low-cost natural gas regions."

He said he expects the North American petrochemical industry will follow the path of its counterpart in Europe to become "a globally uncompetitive producer serving a large local market."

By: Gary Taylor
+1 713 525 2653

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