INSIGHT: Pain racks up for chems companies

17 October 2008 17:39  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The pain has racked up for chemicals companies over the past week as stock prices have ridden the rollercoaster of market turmoil.

But investors are also being warned to be wary of the sector as the impact of the physical market downturn becomes much more widely apparent.

ICIS news has already documented steep product price falls on the world’s chemicals markets but the rate of decline has accelerated.

Investors have caught on to this and the fact that ultimately few producers are immune.

The spreading economic gloom translates into particularly bad news for chemicals players buoyed for so long by healthy global demand growth. Even pockets of strong growth now look vulnerable.

The assertion is that nowhere is immune from the fallout from global financial turmoil although there are those in chemicals who believe that the China market will, relatively, hold out.

Sector stock prices were close to 30% lower over a one-month period as the markets closed on Thursday: Dow Chemical was down 29.55%, BASF 29.18% lower and Bayer down 29.89%.

The value of these major players has dropped in line with the European and US markets.

Some have fared slightly better: DuPont and DSM, for instance, and some much worse - Rhodia is a case in point.

The broad-based and diversified chemicals majors will weather this storm but could be depressed for longer than had been expected just a short while ago.

There are some more focused large players and some medium-sized concerns that look particularly vulnerable.

It has been said before this month, but bears repeating, that a strong balance sheet currently stands a company in good stead.

The highly leveraged are hugely exposed, particularly those trading in commodities.

It has become extremely difficult to do business in rapidly falling physical markets where credit insurance is so hard to secure.

In some markets it is clear that very few are to prepared to take on more than minimal risk. Markets have either stagnated or are populated with smaller transactions. Producer inventories have risen sharply.

Dominated by naphtha, many chemical prices are under extreme pressure as oil prices fall.

Petrochemical prices have plummeted in Asia; in Europe there have been steep falls. Polyolefins and aromatics prices have slumped.

Ironically, Europe’s ethylene producers are sitting pretty and with significantly lower naphtha prices enjoying the strongest margins since 2000, based on the fourth-quarter ethylene contract price.

Buyer calls for a renegotiation of the benchmark are rising and although that is unlikely producer discounts are expected.

It pays to remain calm and analytical amidst the clamour, as BASF executive board member Hans Ulrich Engel suggested last week.

Dealing in what is known, it is clear that the automobile slump will hit some chemicals makers hard. Phenol chain products are under extreme pressure, for example.

BASF said on Friday that it had cut caprolactam operating rates worldwide to 65% from the beginning of the month.

Some caprolactam producers in Europe were known on Friday to have their plants operating below 50%.

Some of the steepest price falls, and the most worrying demand slumps, have been seen in the European and Asian polymer markets.

The Asian polyethylene market has been jittery and downbeat on expectations of weakening demand from downstream application sectors, including consumer and food packaging; prices have been falling.

Some steep price falls were reported this week in China polypropylene.

Demand in China has not returned after the Golden Week holiday. China’s exporters of manufactured goods are being hit by the lack of demand growth, particularly from the US.

Polymers demand in Europe has slumped too, leading to producer stock builds and pressure on operating rates. In the US, Bank of America this week noted that polyethylene demand was weakening as industrial production declined.

Outside the US most chemical companies had a relatively good August, the sharp shift in prices and, to a lesser extent, in demand have been seen in September.

The pressure will be reflected in the slew of third quarter financial results released over the next few weeks.

No-one is expecting much in the way of good news.

Investors are being warned that it could turn ugly for chemicals stocks. The sector is too cyclical and too exposed during an economic slump.

Some pockets are relatively robust - agrochemicals, and, to a lesser extent, industrial gases - but each in turn will be hit by shifting commodity prices and by weaker economic activity.

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By: Nigel Davis
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