INSIGHT: Solvay favours diversity as storm gathers

13 May 2008 17:27  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Chemicals and plastics demand remains strong for Solvay but the worrying warning signs are there.

The Brussels-based producer has been hit by higher raw material and energy costs sufficient to drive first-quarter 2008 recurring plastics operating profits down 25% and chemicals profits down 11%.

Comparisons with the fourth quarter of last year understandably look better, but management has to be realistic.

The record results achieved in 2007 will not be reached in 2008, it says. The pharmaceuticals business will do better but the industrial activities face the full impact of the less favourable economic environment and the weakness of the US dollar.

Solvay says that product demand has been sustained but the watchword in the firm’s first quarter 2008 report is “generally”.

It is a major chlor-alkali producer and says demand for caustic soda has been good but chlorinated derivatives demand is down.

The oxygen chemicals businesses faced an uphill battle to raise prices. Profits for both products clusters were lower in the face of higher energy prices.

Solvay is adding plastics capacities and making major headway in vinyls in Russia with Sibur and with its Pipelife business.

Vinyls sales were flat and specialty polymers sales were down 8% year on year. The comparisons are made with a good quarter in 2007 and profits from both product clusters were down.

Again, Solvay says that demand "generally" was sustained but it saw specialty polymers demand growth slow in the automotive and semiconductor industry.

Exchange rates worked against the businesses generally and price increases only partially offset higher production costs.

Vinyls demand in Asia and the Mercosur countries was good but Europe was affected by higher costs and stronger US competition driven by the weak dollar.

Board chairman Alois Michielsen's comments at the AGM on Tuesday were to the point.

Business life clearly is harder and growth is slowing but globally it is still strong. Rising inflation, higher energy prices and the subprime mortgage crisis are hurting and not encouraging optimism.

“Pending a global restoration of confidence, business is getting harder,” Michelson said. “We will need to exhibit a lot of creativity to remain on course.”

Yet, he maintained that the credit crisis increasingly was under control and that its consequences had been largely anticipated by the financial markets.

The greatest threat is global inflation, he suggested, which would damage European competitiveness, put further pressure on the US dollar and, in Asia, produce social, political and economic unrest.

Events in China, for which economic growth rates of around 10% are still forecast (prior to the Beijing Olympics), for the next three years, need to be tracked carefully, he said.

China and wider Asia and areas such as Mercosur and the Russia federation are important for Solvay which has pushed hard to diversify geographically.

The company is watched increasingly for its growing pharmaceuticals business but suffers from a ‘hybrid’ status.

It should ride out this period better than many in the chemicals and plastics sector but will be put on its mettle by the gathering storm.

The group’s share price fell 4.9% following the first-quarter results announcement, but rallied later, and was down 3.6% at 17:00 local time on Tuesday.

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By: Nigel Davis
+44 20 8652 3214

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