22 September 2003 00:00 [Source: ICB Americas]If the cheering died for chemicals in 2001 as we suggested last year in our September Company Analysis annual review of industry performance, in 2002 a great sigh of expectation went up from the crowd. But it was short-lived. Supporters wanted a home run, a double or at least a single, but the players let us down.
The year in chemicals began with much promise following the knock-on negative economic and business impact of the September 11, 2001 terrorist attacks in New York City. Optimism returned with the new year. Customers re-stocked, and the sector felt brighter again although not for long. Midway through the second quarter the clouds gathered. Downstream demand growth was simply not strong enough to reinforce price increases that were rapidly being undermined. Rising feedstock costs became the order of the day and caused significant problems for producers unable to sell themselves out of trouble.
The "business of chemistry" as it is now referred to by the US trade association American Chemistry Council (ACC) and others began to lose its sparkle about mid-year. The large energy and upstream feedstock users were affected, but it was not long before most other companies were feeling the pinch. The potential for a war with Iraq cast a cloud over all manufacturing sectors later in the year.
Our analysis of the performance of the top 150 chemical companies (ranked by sales) reflects the growing difficulties 2002 presented to companies across the sector and in most regions of the world. China remained the powerhouse of chemicals demand and the numbers from some companies reflect that.
If 2002 demonstrated anything, it showed that many companies would have to continue to do a great deal in terms of cost control and restructuring to squeeze more from less. As the year progressed, it rapidly became clear that earlier economic growth and manufacturing industry optimism were not sufficient to carry the day.
The data compiled reflect the tough operating environment and some of the winners and losers in the industry in 2002. Few of the established chemical companies in Europe were able to grow strongly but that was hardly surprising given the difficult operating conditions. The same was true for the majority of producers in the US. Companies were, however, able to push more cash through to the bottom line, and there was more profit to be had through tighter cost control.
The global data reflect this year-over-year profit growth in 2002. Sales were up just 0.6 percent, but operating profits were almost 15 percent higher compared with 2001. Net profits across the industry rose on average by nearly 56 percent.
Our data show how costs were controlled. Western chemical companies focused on cutting back capital spending and selling, general and administrative costs (SG&A). The most significant cutbacks were in capital spending, but these cuts were by no means apparent across the board. Capital spending among the leading European companies was lower in 2002. Cuts in the US averaged 6 percent. Globally, however, capital spending was 10.5 percent higher.
There are many driving forces at work in chemicals but most significant is the rush to capture greater market share in the fastest growing markets. Some companies are spending a great deal just to get a foothold in the business while others are expanding rapidly. The data show the continuing rise of producers in the Middle East and also growth for the large Asian companies outside Japan.
A worrying feature of this extended downturn, particularly for such an apparently technology and innovation-led industry, is the continued reduction in research and development spending, which fell by 0.4 percent in 2002. Companies probably can make do with spending less on research and focusing research efforts more. But the question has to be asked whether potentially innovative work is being curtailed in favor of more short-term oriented product fixes and extensions.
It has to be remembered that toward the end of 2001, companies were idling plants and laying off staff in the face of almost non-existent demand. Many firms had decided that it was better to let 2001 slip into memory than battle against the odds. Enthusiasm returned in the early weeks and months of 2002 and persisted for some time, but it was clear as the year progressed that the powerhouse of the world economy, the US, would not gain significant momentum. Cuts had come thick and fast in 2001 and while there may have been some loosening of belts early in 2002, they were being tightened again by the third quarter.
The Reed Chemicals Group annual analysis of company fortunes is prepared by our journalists worldwide and is based on published data from the leading 180 companies in the sector by sales. We focus on chemicals but also on being able to make comparisons between companies, and so we look at corporate data and only at divisional results for the oil majors and others whose businesses are not primarily in the chemical industry.
Our main table is ranked by sales and data are shown in US dollars, but comparisons are made in local currencies. We use Federal Reserve Bank of New York year-end exchange rates and the most recent fiscal year for all the companies analyzed.
The rankings have been affected by many factors, but currency movements, particularly the weakening of the US dollar, need to be mentioned. By the end of 2002, the euro/dollar rate had moved 17.8 percent from the end of 2001. Between the end of 2001 and the end of 2002, the Swiss franc had strengthened by 16.7 percent against the dollar.
We looked at operating profit (essentially EBIT-earnings before interest and taxes for US reporting companies and some others) and net profit to give an indication of how well companies performed at the business level in 2002. We chart companies' spending commitments for the year. Our full Company Analysis data set looks at other aspects of profitability. It comprises: Sales, Number of employees, Pre-tax Profit, Operating Profit (EBIT), EBITDA (earnings before interest, taxes, depreciation and amortization), Net Profit, PPE (property plant and equipment), Total Assets, R&D, Capital Expenditures, Depreciation and Amortization, Long-Term Debt, Net Debt, Shareholder Equity, SG&A (selling general and administrative expenses), Earnings per Share and Net Interest Expense. We have collected data in this format for the past three years but have equivalent data going back more than 23.
It is perhaps not surprising to see that the margin rankings in 2002 were dominated by companies outside the large producing areas of North America and Europe. There is a specialty but also a regional bias to margins at both the operating and the net level.
The Company Analysis data show that companies were relatively successful last year in paying attention to debt levels. But there is no doubt that in tough operating conditions some were finding the servicing of high debt levels an acute burden. That situation has persisted into 2003 as an upturn has been pushed further back-possibly towards the end of this year and probably into 2004.
Indeed, 2003 has seen a great deal more of the same performance pressures that became so apparent in 2002. Companies expressed expected optimism for the year at its start but that optimism has been tempered by reality. The war with Iraq put a great burden of uncertainty on business that has been slow to lift. There is a lot of anticipation of the upturn but little or no evidence of any substance (outside the US at least) that might suggest it is just around the corner. The crowd continues to be frustrated by uncertain play and the players by poor visibility. We still wait for the great roar to begin.
*Further details of the full Company Analysis data set can be found on the Reed Chemicals Group 24-hour global industry news service Chemical News & Intelligence (see www.cnionline.com)
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