INSIGHT: Putting restructuring to the test

13 February 2008 17:54  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The upcoming results season in Europe will yield more questions than answers. The sector outlook is cloudy to say the least with few firms able realistically to forecast the outcome of the year ahead.

Total, for instance, talked on Wednesday of the tight squeeze on its petrochemicals business in the fourth quarter of 2007. That will have persisted to a great extent into 2008.

It is focused on developing production locations based on advantaged ethane feedstock in Qatar and Algeria and on large integrated production platforms in Europe and the US.

At the other end of the scale in chemicals, DSM, closer to the life sciences and active in advanced materials, believes that it can hold profits against some difficult headwinds.

“Guidance on profitability is a difficult task this year given the current macro-economic uncertainty,” it says. But it makes its analysis assuming little knock-on effect on macroeconomic conditions elsewhere of a slowdown in the US economy; a euro/$ exchange rate around 1.45 and current raw-material and energy prices through the year.

Economic uncertainty will cloud the guidance of most firms this reporting season. Sector growth has slowed appreciably over the past few months, the slowdown most obvious in key US markets such as construction and automobiles.

European demand growth is expected to slow further and realists see even the powerhouse demand drivers in chemicals such as China filling something of a chill wind. Continues high and probably volatile raw material prices will help no-one.

As at this time last year, it is difficult to talk in general terms about chemicals sector performance. Individual players will face different pressures in different market segments.

Financial analysts make this point, expressing some concern about the on-going performance of industry giant BASF – which is still seen as being exposed to cyclicality and global economic slowdown. The top stock picks are in defensive segments which have either some environmental focus or, like industrial gases, remain on something of a roll given demand growth for products and services in the world’s developing economies.

Most if not all US CEOs so far this year have stressed the importance of the sales and profits made overseas to future profitability. European players might expect to retain somewhat stronger demand growth in their domestic markets but also come to rely much more heavily on investments made over the past few years in new production facilities and fast growing markets in Asia.

But if global growth suffers because of the US downturn then some, such as analysts at Citigroup, suggest that the decline in the supply/demand cycle expected to take hold in the second half of this year across important olefins and polyolefins markets will be more pronounced.

A recession in the US and slower growth in Europe will hit the important construction and automobile markets. Chemicals will suffers as the credit crunch bites further in Europe.

Citigroup has buy ratings currently on defensive stocks such as Bayer, Linde, Air Products, Praxair, Givaudan, Symrise, Ecolab and Nalco, on the agrochemicals plays Monsanto and Israel chemicals and on Wacker Chemie.

Among the companies it covers, Credit Suisse in Europe is comfortable with Akzo Nobel, cautious about Air Liquide, believes Lanxess is challenged and that Linde has the greatest possibility of surprise.

As commodities become more pressured from slower demand and high feedstock costs then the flight is not so much to specialties but to value. And, of course, companies can capture value in many ways.

The work put in over the past three years and more to hone portfolios and to capture real advantage – whether in a market or, indeed technological sense – will have to prove itself in a slower growth environment.

Companies claim to have done much in the good times in the way of restructuring and rationalisation. Now the value of those efforts will be put to the test.

By: Nigel Davis
+44 20 8652 3214

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