14 November 2007 16:27 [Source: ICIS news]
By Peter Salisbury
ANTWERP (ICIS news)--The current volatility of aromatics markets, particularly benzene, is leading to undervaluation of chemical company stocks, a senior financial analyst said on Wednesday.
Dr Paul W Satchell, managing director of ING Wholesale Banking's equity research chemicals division, outlined the cost to producers using benzene feedstock in a paper entitled "Aromatics and the markets - not a marriage made in heaven!" at the 6th European Aromatics & Derivatives Conference.
"Commodity chemicals have traditionally made fund managers nervous," Satchell said in his opening address, adding that "investors approach [them] with something close to fear."
Satchell said market volatility was a key risk factor in evaluating companies' shares. Aromatics, benzene in particular, he continued, are known within the financial community for their volatile nature.
Both companies, Satchell showed, had outperformed both financial benchmarks used by analysts to assess the investment value of chemical companies and the European chemicals market seen as a whole.
Yet where these success stories had been noted other, contrary, results had been seen corresponding to the uncertainty which distracted investor interest from companies using aromatics.
GE decided to divest its plastics division in 2006 after a run of difficulty, Satchell said, quoting GE chief financial officer Keith Sherrin: "The biggest thing that we have been wrestling with, and I know you're sick of hearing it, is benzene."
The options for companies in markets which made use of aromatics were limited, Satchell said. They could either take the verbund (integration) approach used by BASF in recent years, or divest themselves of "problem child" businesses, as had GE.
Another option would be to add new elements to the company's portfolio which were either less cyclical, or counter-cyclical to those which saw a company underperform.
This, however, was seen as an unproven strategy by the financial markets, Satchell said.
Satchell also reminded conference delegates that a company would always be judged on the basis of its poorest-performing business unit, not its best.
"The way people deal with volatility is to have a paper market," Satchell said on the sidelines of the conference.
"There isn't one in the benzene market. This is needed to allow for hedging. You need to be able to offset to allow for hedging. You need to be able to offset risk."
"Scale without integration is not a solution. Having verbund alone doesn't work either," Satchell said, adding that major companies currently hoping to be re-evaluated as healthcare or life sciences would continue to face difficulties as long as they dealt in volatile products such as benzene.
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