INSIGHT: Looking for pointers to growth

23 July 2008 16:16  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The stock market performance of European chemical companies has hardly been inspiring of late as the sector has suffered from a distinct lack of confidence on the part of investors.

Profits have been taken as the tenor of the debate is raised about just how hard hit most companies have been by significantly higher raw material, energy and transport costs.

At the same time concerns over slowing growth are very real – although the threat is possibly overblown.

The headlines to some recent analysts’ reports say a great deal: 'Raindrops keep falling on my head’ and ‘Material Concerns’ from Credit Suisse, while Citigroup’s latest Global Chemicals Cracker report shouted ‘EU cracker margins at lowest since 2002’.

These are difficult times for chemicals, certainly, and the operating environment is likely to get worse.

But across the sector, performance that is down sharply in one region is balanced by stronger growth and, at least, the greater opportunity to make money in the other.

There is some room for encouragement. DuPont said on Tuesday that it had continued to grow the top line in developing markets in Europe alongside those in Asia and Latin America and had been relatively successful at passing on significantly higher costs.

Everyone tends to look at the ethylene cycle and draw broad conclusions about performance potentials in chemicals. Yet most of the olefins and polyolefins business in Europe now is either in private or oil industry hands.

We have yet to see any real data that might demonstrate the impact of cost pass-through on quoted players further down the chain.

“Just how special are the European specialties?” Credit Suisse asked in its latest weekly chemicals report for Europe.

Profits are being squeezed by high raw material prices and strong currency headwinds. Its analysts see weakening global demand holding back growth in the second half of this year and into 2009.

Some companies are better able to cope than others. Credit Suisse likes Lanxess but is not too keen on Ciba Specialty Chemicals or DSM. It positively loves Akzo Nobel and is relatively bullish on Clariant.

Sector companies, however, underperformed the market last week even though individual share prices were up sharply.

Earnings projections have been moved slightly with cutbacks for some balanced by upgrades for others. While the feeling may be that sector performance generally is heading down, there appears to be room for some more positive news.

Clearly, some portfolios are more exposed than others. And the stories told by some managers, espousing segment robustness and the ability in certain business not only to grow but to effectively pass costs on, will be too.

Yet credit must be given to managements that have worked hard through the better times to drive efficiencies up and, in the most cyclical cases, break-even points down.

Their earlier actions are likely to be tested to the full as, crucially, will their ability to move swiftly to implement new cost controls.

Companies will need the room and the ability to act if they are to see off the worst slower growth and higher costs can throw at them.

Ciba is exposed to price deflation as well as cost increases. Its gearing is high. The company’s record on restructuring is not good and Credit Suisse does not think that new management is likely to make sweeping changes.

The bank also feels that the DSM transformation story is overblown and that the company remains exposed to cyclical end-use markets.

Clariant surprised investors in the first quarter with a much stronger than expected profits increase. The question is whether that level of performance enhancement can be repeated.

Can new management deliver and can the company put behind it a reputation for promising a great deal but producing very little?

Rhodia’s share price has plunged 25% recently and the company looks exposed on the petrochemical and minerals raw material front. The test for performance is likely to the robustness or otherwise of its markets globally.

LANXESS will be watched for the performance of its rubber chemicals but the company has, according to analysts, managed rising costs and adverse currency movements well.

The key messages to be drawn from the latest reporting season will be drawn not so much from April to June financial performance but from the outlooks companies give for growth.

Industry commentators and economists expect sector growth to slow this year. How confident are producers that they will be able to capture additional volumes to fend off the impact of rising costs and currency gains?

To discuss issues facing the chemical industry go to ICIS connect

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