INSIGHT: Solution providers have pricing strength

30 July 2008 17:53  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Some chemical producers have done remarkably well at passing on skyrocketing energy and raw material costs through higher product prices in the latest quarter.

The performance this week, particularly, of Netherlands-based DSM and France’s Rhodia, has caught some market watchers by surprise.

The DSM profits performance came in above consensus as did that of specialities maker Rhodia. Both have been working hard at trying to pass on significantly higher raw material and energy costs while battling with the adverse impact of the strong euro.

DSM’s second-quarter performance had a great deal to do with the upturn in vitamins and agriculture so, not surprisingly, questions are still being asked about the robustness of the company’s advanced materials businesses.

Rhodia is probably most exposed in polyamide but as the results were announced said it would implement a temporary surcharge on nylon 6,6 prices given the raid uptick in butadiene costs. Butadiene spot prices have shot up. Contract prices have been difficult to negotiate but have been agreed markedly higher.

Rhodia has delivered on an earlier promise to focus on price and returns even if that meant losing some volumes. The operating profits for the quarter matched those of last year and were distinctly higher on a constant currency and comparable portfolio basis.

Rhodia has proved yet again that it is doing a great deal that is proving to be right.

The portfolio has been simplified  - or, rather, decluttered - and the last piece of that jigsaw, the isocyanates business, will be removed soon.

Rhodia is working to move its European Acetow, acetate tow, business more to a euro basis. (Currently, product is sold in US dollars.)

Rhodia is weighed down somewhat by nylon 6,6 and the cyclical adipic acid business in Asia but said its adipic acid plants were running close to full capacity. But CEO Jean-Pierre Clamadieu said the company continued to see what he called a “satisfactory level of demand in almost all our businesses”.

The weak points, as might be expected are those products sold into the construction and automotive sectors in North America.

Rhodia does not see much beyond a seasonal slowdown in Europe in the third quarter to adversely affect volumes. It can, then, focus on price and on securing the increases necessary to retain margins.  

The company has also not wasted any time in securing income from the carbon credits it receives for the carbon dioxide (CO2) abatement technology it has applied in plants in Korea and Brazil.

There had been a significant increase in the size and depth of the carbon market, it said. It will have 13m tonnes/year of carbon equivalent credits for sale over the next five years. Working in the Orbeo joint venture with Societe Generale it said it had secured a good system to commercialise these credits.

Rhodia is one company in Europe that has been transformed in recent years. Others include DSM, Arkema and Lanxess. It has become a solutions provider with a portfolio aligned very much with the customer in mind and product lines backed by intensive R&D (research and development).

Because of where it sits, Rhodia is in a better position than some to pass on price increases. Chemicals makers used quite easily to be labelled as either producers of basic chemicals, of intermediates, specialties or services. But many believe that the world has changed and that the real power now lies either with low cost suppliers or with solution providers.

In a soon to be released study from consultants International e-Chem, the rationale for the split is well made. Low cost suppliers, ExxonMobil, for example, and solution providers, such as Rhodia, have some control and oft times adequate leverage on prices.

Unfortunately, those who have not yet decided what they are, are dangerously exposed to the squeeze on margins from raw materials suppliers upstream and downstream consumer giants.

Companies that continue to position themselves in the middle of product chains run great risks. They face pressures from all sides and as European players such as Clariant and Ciba Specialty Chemicals have shown can rapidly lose any pricing power they once had.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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