24 June 2005 17:00 [Source: ICIS news]
However, the outlook has suddenly become more uncertain with the re-emergence of $60/bbl oil and natural gas futures pushing $7.70/m Btu. In addition, Wall Street continues to slash profit numbers for commodity chemical companies.
"We think the second quarter is shaping up to be a difficult one for many of the upstream commodity petrochemical producers," said Banc of America Securities analyst Kevin McCarthy. "Everything coming out of the ethylene cracker has weakened sequentially versus the first quarter in
"Pressure is increasing on second quarter earnings because of rising feedstock prices, weak demand in
On a sequential basis, overall chemical industry earnings performance will likely be mixed. Commodity companies will largely report significantly lower eps in the second quarter versus the first as prices have come down sharply in a number of petrochemical and plastics products.
For example, Lyondell’s second quarter eps is expected to come in at 68 cents - a decline of 38% from the first quarter. Nova is expected to post a 64% decline in eps to 38 cents.
On the other hand, specialty chemical companies will mostly flat-to-higher sequential earnings as they gain pricing power and margin expansion from lower raw material costs. Sequentially, DuPont is expected to post flat profits, while Rohm and Haas’ earnings are expected to rise 6%.
On a year-over-year basis, companies poised to post robust eps gains include Dow with a 73% increase, Eastman 102%, Nova 27%, DuPont 20%, Rohm and Haas 42%, Crompton 400%,
Lehman Brothers slashes estimates
Lehman Brothers analyst Sergey Vasnetsov, who has been correctly bearish on the commodity chemicals group since March with a "negative" rating, is downgrading Nova Chemicals from "equal weight" to "underweight" and slashing profit estimates across the board for commodity chemical companies.
For Nova, the analyst is cutting his second quarter eps estimate from a profit of 53 cents to a Wall Street-low loss of 36 cents, and halved his full year 2005 forecast from $3.05 to $1.52.
"The second quarter estimate change is mainly due to a negative effect from first-in, first-out accounting [FIFO], and a downward revision to ethylene/polyethylene and European polystyrene," said Vasnetsov.
The analyst is also drastically slashing his 2006 eps estimate for Nova from $5.20 to $2.62.
"Nova’s ethylene/polyethylene segment underperformed Equistar during the most recent ‘hill’ of the ethylene cycle, and we are concerned that the Nova olefins segment contribution to eps at the next hill in late 2005 to early 2006 would be meaningfully lower than previously expected," said Vasnetsov. "We are giving up on the styrenics cycle, due to structural problems which are difficult to cure."
For Lyondell, the analyst is cutting his second quarter estimate from 65 cents to 57 cents and his 2005 forecast from $2.87 to $2.55. On Dow, he maintains his $1.22 estimate for the first quarter, but is trimming his full year 2005 forecast from $4.62 to $4.50.
B of A cuts numbers
Banc of America’s McCarthy recently cut profit estimates on Nova,
The analyst cut his second quarter estimate for Nova from 77 cents to 52 cents/share, and his 2005 number from $3.80 to $3 on weakness in the styrene and ethylene chains.
McCarthy also slashed estimates on
More modest cuts were in store for Eastman, where the analyst trimmed his second quarter estimate by 15 cents to $1.79 and his 2005 number by 25 cents to $6.20; and for Dow, where the second quarter estimate came down 2 cents to $1.21 and the year down 20 cents to $4.50.
"Companies that use FIFO accounting such as
Energy prices surge
One major concern for the overall earnings outlook is the resumed upward surge in oil and natural gas prices. Crude oil has shot up $10 to $60/bbl in recent weeks.
"Over the near term, we think elevated crude oil and natural gas prices could spell more feedstock pain before gain," said McCarthy. "This will result in near-term margin compression before resin producers will have an opportunity to pass those costs downstream later this year when capacity utilization recovers from the sluggish volumes we’ve seen in the second quarter."
While the second quarter generally looks to be strong on a year-over-year basis, some companies have announced profit shortfalls.
Most recently, Rohm and Haas announced that unexpected operating issues during planned maintenance activities at its acrylic monomers facility in
JPMorgan analyst Jeffrey Zekauskas is trimming his 2005 eps estimate on Rohm and Haas by a nickel to $2.80 versus $2.17 earned in 2004. However, he continues to expect 10% sales growth, gross margin improvement from higher selling prices outpacing raw material costs and lower operating expenses as a percentage of sales.
"The eps shortfall is transitory in our view, and is unlikely to negatively affect the long-term fundamental value of the company," Zekauskas said. "Lower cost absorption in the monomers business stemming from a prolonged maintenance shutdown is likely to be temporary, and we don’t expect additional writedowns to the adhesives asset base related to the leather and gloss lamination products."
On the commodity side, Methanex said it expects to lose about 65,000 tonnes of methanol production in the second quarter because of curtailed natural gas supplies from
Other companies that have warned of upcoming earnings shortfalls include
While the overall earnings picture could deteriorate in the months ahead, bright spots include inorganic chemicals and specialties.
"Chlorine, caustic soda and soda ash all are maintaining high operating rates and reasonable pricing power in mid-2005," said Banc of America’s McCarthy. "In specialties, we’ve seen evidence of success in raising prices across a number of companies, including the specialty components of Dow and Eastman."
(For additional Chemical Market Reporter analysis, visit the CMR Web site at: http://www.chemicalmarketreporter.com.)
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