Europe’s speciality chemicals makers will struggle in '05

16 May 2005 17:03  [Source: ICIS news]

LONDON (CI)--Life is still good upstream in the chemical industry. Closer to the industrial user and consumer, however, it is another matter.

 

The slew of first quarter financial results from Europe’s specialty chemicals makers over the past fortnight has highlighted the fact. The spotlight has been turned on market segments where producers are finding it difficult to capitalise on growth. In some instances, even that growth is under pressure.

 

A scan of recent news reports picks out businesses like textile dyes, pharmaceutical intermediates, water and paper treatment and even paints and coatings. Makers of chemicals in these segments are by no means operating in a benign environment. Business for them is tough with increased competitive pressure, high raw material costs and largely unfavourable currency effects.

 

One might think that at this point in the chemicals cycle most firms would be bouncing along. However, this is hardly the case. Progress has been made, certainly, as stronger demand growth has lifted product lines that not too long ago were under pressure. But one type of pressure has been replaced by another.

 

Sales growth has slowed with new volumes harder to find. At the same time, it has not always been possible to pass on higher costs. These pressures have been apparent even in the headline figures of the specialty majors.

 

Degussa last week reported group sales 3.3% higher but operating profits down 7% in the first quarter. Earlier, Clariant said that its first quarter sales were down 3% and operating profits (earnings before interest and tax – EBIT) down 25%. Not so long ago Ciba reported sales up a seemingly healthy 8% but a first quarter EBIT down 24%. ICI said Q1 sales had climbed just 2% although its trading profit increase was 8%.

 

Seasonal factors are to blame for some of this pressure on Europe’s biggest specialty chemical makers so we all wait to see how the (presumably more buoyant) second quarter pans out. Halfway through the quarter, however, the outlook is not particularly bright.

 

Trying to translate weaker growth into stronger profits is, of course, proving to be difficult. A great deal of this has to do with Europe’s weak economic and industrial growth and lower chemicals demand growth from China.

 

Companies have cut costs (and continue to do so) but as ICI chief executive, John McAdam, suggested some time ago, there comes a point where it is that much more difficult and expensive to trim costs further.

 

The reality for Europe’s specialty chemicals makers is a world of much higher raw material costs and a weak US dollar.

 

First quarter EBITDA (earnings before interest, tax, depreciation and amortisation) margins indicate where a great deal of the pressure lies.

 

Degussa, for example, only saw margin growth in construction chemicals, just one of its five divisions. Poor Clariant saw double digit falls in margins across its five business segments: textile leather & paper chemicals, pigments & additives, masterbatches, functional chemicals and life science chemicals.

 

Margins at Ciba were under severe pressure in the quarter with the biggest slump in textile effects. The company’s plastics additives business was able to pass higher input costs on and lifted EBITDA margins by 9%. The ICI story is somewhat similar with its National Starch and paints businesses under pressure. Two other businesses, Quest and Uniqema, managed to battle against the tide.

 

In the circumstances, it is not wise to expect too much from the European specialties sector in the first half. As Degussa has noted, world economic growth has slowed. At the same time, raw material cost increases have worked their way downstream. The pressure of higher cost oil on growth is making it increasingly difficult to pass higher costs on.

 

Of great concern, also, are the structural factors battering businesses like textiles, some pigments operations and fine chemicals, including intermediates for pharmaceuticals and agrochemicals.

 

In the second half and over the rest of this year at least companies will have to make the most of whatever growth they find.

By: Nigel Davis
+44 20 8652 3214

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly