INSIGHT: Getting smarter; growing stronger

02 November 2007 16:11  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Chemical companies are showing signs of wilting under the strain of costlier energy, feedstocks, currency fluctuations and slower demand growth in some segments.

The third quarter did not prove easy for most firms and was probably the tipping point for some.

This though will still prove to be a good year and some records will be broken. The fourth-quarter outlook is relatively robust but probably not as strong as the industry would like.

That is hardly surprising given the backdrop of record high crude and naphtha prices and the continued fall-out from the US subprime mortgage fiasco.

US companies particularly have felt the full force of the subprime crisis on the domestic construction market. Sales and profits have been hit.

The US economy continues to confound doom mongers but one wonders just for how long. Chemical producers that sell into the automotive sector have also felt the squeeze.

Multinational chemical companies are buoyed, though, by continued strong chemicals demand growth from Asia and Latin America and, to the surprise of some, continued strength in Europe.

Indeed, it is Asia demand and demand from stronger growth regions such as Latin America that will support the business running into next year.

The 2008 outlook for the leading chemicals makers is largely positive, with non-US sales and profits particularly balancing an increasingly tricky North American operating environment.

Yet the feeling is more widespread that the sector as a whole sits on an earnings plateau and that the US outlook at least remains “uninspiring”.

It would be good to feel that 2008 will turn out to be another year of solid earnings performance for sector companies. Most seem to subscribe to that view.

The greatest challenge remains high and volatile feedstock and energy costs. Producing companies can be expected to remain aggressive in the market to push derivatives prices higher so as to maintain margins.

Demand has not given way to any great enough extent yet for producing companies to lose their pricing power.

A quote from Dow Chemical talking about the outlook is apposite: “We will mitigate these headwinds, as we have for several years, through aggressive actions to maintain margins, by keeping tight control over the costs we can control and through our joint ventures, which have competitive feedstock positions.”

The major companies seek stronger growth in emerging markets and, in Dow’s case, a stronger foothold in feedstock-rich areas in the Middle East.

The push towards higher added-value businesses remains fascinating.

It is still not clear, for instance, exactly what Dow will do to broaden its performance products footprint. The company is maintaining its strategy to put more of the bulk businesses into “asset light” joint ventures and the growth performance side of the portfolio.

Analysts are speculating as to whether Dow will put its commodity business into a joint venture or divest all or part of it entirely. They have also looked at the ‘fit’ of the company with small-to-medium sized specialty players or a possible enhancement of the agriculture portfolio.

Dow alongside BASF has numerous options. It said last month that it was considering 60 possible transactions, including joint ventures, acquisitions and divestments.

The efforts being put by Dow, BASF and other major players such as DuPont into research and innovation are noteworthy. BASF has enhanced its technology base and potential capability by striking some innovative collaborative research alliances.

Du Pont remains bullish about 2008 alongside its peers. Emerging market growth will underpin sales growth, the company says. And it anticipates significant earnings growth in the agriculture and nutrition segment.

Looking beyond 2008, DuPont is well positioned to capitalise on exciting growth and opportunities in markets such as energy efficiency, agriculture productivity, renewable energy and safety and security, says CEO Chad Holliday says.

“We have aligned our research and development investments with these growth opportunities and are positioned to deliver attractive returns in these fast growing markets with a strong pipeline of new technologies and products,” he adds.

New technologies, new products and new markets will help drive the chemicals business from 2008 onwards, when the operating environment is expected to worsen.

Companies have to be putting in place now the deals and ventures that will help see them through tougher times.

By: Nigel Davis
+44 20 8652 3214

< previous article(VIDEO - ICIS news Europe Lunchtime Bulletin 27 October 2009)

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