INSIGHT: Euro specialty results eyed for pricing power

08 November 2005 17:10  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Europe’s specialty chemicals producers reporting third quarter financial results this week are a good sounding board for key regional markets from textiles to construction as well as downstream chemicals.

Degussa's results, released earlier on Tuesday, reflected its own ongoing battle with higher costs and limited pricing power. Specialty makers are not so much chasing their tails as still finding it tough to maintain the momentum behind higher prices to offset raised feedstock costs.

There is a disconnection here that was particularly apparent in Q3. Basic chemicals prices have fluctuated widely in 2005 against much higher, but latterly easing, oil prices. Gas and electricity prices have also continued to rise and, judging by Degussa's forecast, will weigh even more heavily on costs next year.

Of greatest concern for producers of more specialised chemicals and services has to be the progress of feedstock and energy price in the fourth quarter and running on into next year. European companies could face difficult winter months on the energy front.

The top specialty chemicals makers will also provide important indicators as to the robustness of European industrial growth. A lacklustre performer for too long, there are signs of improvement.

Chemicals sales volumes have come off 2004 highs and producers have been pressured even more to drive up prices in search of top line growth. In the current circumstances, undoubtedly they need the support of stronger European demand growth.

Degussa’s operational concerns will have a structural impact. The company does not appear to have great pricing power in the market and cash flow generation has been below expectations. Degussa will make a significant loss in 2005 after taking impairment charges against the troubled fine chemicals business. Majority shareholder RAG is far from happy and there is talk of more change.

Both Clariant and Rhodia have been through the mill and offloaded under-performing businesses. Somewhat better times have taken the pressure off the need for ‘fire sale’ divestments but recovery at both firms clearly needs more time bed in.

This is where the ability to pass on higher costs in product prices becomes important. Rhodia, which reports Q3 results tomorrow, has done better in 2005 and no longer carries the burden of acute short-term liquidity issues. Performance is linked closely, however, to its ability to pass on effectively benzene and other feedstock costs.

Clariant has been troubled this year with performance across its textile leather & paper chemicals, pigments & additives, masterbatches, functional chemicals and life science chemicals divisions. Third quarter group operating profits before exceptional items were up year-on-year thanks to further cost savings and restructuring but only the textile, leather and paper chemicals division showed a major improvement in earnings.

Indeed, the latest results from each of these firms will be pored over for signs of just what more in the way of cost savings managements realistically believe they can achieve. At the same time the focus will be on the ability of individual businesses to cope with fluctuating input costs.

Managing costs is critical but is only part of the game as consultants KPMG pointed out only a short while ago. Achieving above average growth in specialty chemicals is a goal as much as it is elsewhere in the industry.

By: Nigel Davis
+44 20 8652 3214

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