INSIGHT: Gloom on the horizon for chems in H2

22 October 2008 16:28  [Source: ICIS news]

By Hilde Ovrebekk

LONDON (ICIS news)--The last couple of weeks’ results and earnings forecast warnings have given us a taster for what is to come in terms of company performance for the rest of the year, and it's not looking good.

Steven Welch, chief operating officer of BP's international business refining and marketing segment, warned at a press meeting earlier this week that operating margins in the second half of the year would be lower than the first half as it is facing a global collapse in demand for its products.

The fall-off, which became more noticeable around six weeks ago, had led to zero or even negative demand growth for some products, he said.

But BP’s international business refining and marketing segment, which has annual sales of $13.5bn (€10.3bn), is not the only company facing a second half of the year ridden by weak demand and uncertainty in the financial markets.

On Friday, Norwegian fertilizer major Yara’s third-quarter operating profits surged, but it missed analysts' average forecast and its shares plummeted as it said sales had slowed and uncertainty had grown.

Both BP’s Welch and Yara CEO Jorgen Ole Haslestad said the companies would continuously consider adjusting their production to match demand.

Other chemicals producers have also been talking about possible plant shutdowns as trade has ground to a standstill.

In the US, acetyls producer Celanese, despite a 23.4% increase in third-quarter net earnings to $158m, on Tuesday cut its 2008 earnings forecast based on the assumption that a recession had begun in Europe and economic recovery in North America was not on the horizon.

Celanese chairman David Weidman said acetic acid prices in Asia had dropped sharply in the last few weeks.

"Basically, orders just stopped," Weidman said.

US acrylonitrile (ACN) supplier Cytec Industries also reduced its 2008 earnings forecast by 10% late on Thursday due to a weakened economy and a string of one-time costs.

“We have witnessed further demand destruction in the Asian acrylic fibres market which has weakened demand for ACN in the second half of 2008,” CEO and chairman David Lilley said.

US diversified chemicals company Ashland said on Tuesday it expected to record a fiscal fourth-quarter loss in its water technologies business due to a significant reduction in gross profit percentage across all regions, with the fourth quarter being particularly weak.

So, is it all doom and gloom?

Welch said it was difficult to tell how much of the downturn was due to the global economic slowdown and how much was down to destocking by customers.

Prices for commodity chemicals have risen to historical highs and then plummeted in the space of only a few weeks, and people are currently trying to get rid of expensive material, according to Welch.

Others may be on the sidelines waiting for prices to drop further, as raw materials prices have proved increasingly volatile over the past few months.

However, analysts seem to think the economic slowdown and a possible prolonged recession is to blame for earnings forecasts cuts.

Analysts said on Monday that the US economy fell into a recession during the third quarter, and the nation's chemical companies would likely report weaker earnings as a result.

"We believe hefty earnings cuts are required, consistent with synchronous global recessions," according to a research note by Kevin McCarthy, an analyst with Bank of America. "Few will be spared in our view."

Yara's chief financial officer Egil Hogna said commodity markets had been hit by a withdrawal of cash, mainly by hedge funds and other financial investors.

The company said global financial turmoil was also affecting its business, its customers were facing credit problems and uncertainty had grown.

Whatever the reason, demand has dried up and based on what we have seen so far we can expect more reasonable third quarter results to be overhadowed by miserable outlooks for the rest of the year.

($1 = €0.76)

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By: Hilde Ovrebekk
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