INSIGHT: Chemical makers need diversity

22 April 2008 17:39  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Financial performance sector-wide in the first months of 2008 has been driven by exposure to fast-growing emerging markets and to pressured sectors such as, in the US, housing construction and automobiles.

DuPont demonstrated as much on Tuesday as it reported strong sales and earnings growth linked not so much by its core chemicals businesses as to agriculture - seeds and crop protection products - and its presence in markets as far-flung as Brazil, China and eastern Europe.

Other US chemicals players are showing how tough life can be at home. Paints maker Sherwin Williams reported a 30% drop in first quarter profits.

First-quarter pre-tax earnings at Rohm and Haas fell 13% largely because of the construction downturn. In its specialty segment, which includes products used in construction, paints and coatings, profits were down 12%.

Another specialties player, Albemarle, reported a 17% fall in profits from its polymer additives businesses. It expects high raw materials and energy prices to continue exerting pressure on operating margins.

The world has yet to hear how the big petrochemicals and polymers makers have performed but the pressure will have been on margins in such a high cost feedstock and energy environment.

On the demand side, the credit crisis eventually is expected to hit chemicals businesses running back upstream to the cracker.

The Europeans that begin to report this week will have been cushioned by a still relatively benign regional growth environment but exposed by the strengthening euro.

Credit Suisse chemicals analysts have put it in a nutshell. For their European chemicals universe, they suggest the themes remain largely, currencies, raw materials, the potential for price increases and any sign of slowing demand.

We have been looking for the latter for months but as yet not seen any clear slowdown. Credit Suisse expects first-half sales for the diverse group of chemical companies it covers in Europe to remain essentially flat.

Companies have to expect demand growth to dip, however, as high crude and fuel prices hit harder, and as economic growth weakens. In the current environment, business proceeds with caution.

Geographical diversity then is increasingly important.

European producers have moved faster than most of their North American counterparts in recent years to capture growth and can reap the benefits of a presence in China and other emerging markets.

Yet in these markets, as anywhere else, brand strength and reputation play a role as does technological clout, a point made by the bank.

The successful chemical companies rely heavily on a real commitment to technical progress, whether related to new products or line extensions, or to process enhancements.

Firms this year will be challenged as costs rise and, in some products, supply/demand balances tip against them. Any loss of pricing power would prove critical when raw material and energy costs are working against them.

Chemical producers operate in an uncertain and increasingly difficult operating environment. Executives may put some gloss on 2008 in the current reporting season but no company can afford to be too bullish.

This may prove to be a tough year for chemicals and for other manufacturing sectors.

By: Nigel Davis
+44 20 8652 3214

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