22 October 2008 17:02 [Source: ICIS news]
By Mark Watts
LONDON (ICIS news)--With the European chemicals sector relatively unaffected by the global financial crisis up until October, investors will be focusing on producers’ outlooks as they announce third quarter results over the next few weeks.
The last few weeks have seen dramatic changes for the vast majority of companies, driven by deteriorating credit conditions and a slowdown in US and European demand.
Measured by the Dow Jones Eurostoxx indicator, European chemicals markets have plunged by nearly 20% since the start of the fourth quarter (1 October), signalling a decline in investor confidence, while earnings targets were slashed across the sector by equity analysts.
“In the current depressed environment we believe investors could lose sight of the fact that the third quarter was not too bad and we should see some good numbers,” said investment bank Credit Suisse.
“The real test is how positive outlook statements for the fourth quarter should be,” it added.
Credit Suisse predicted growth for most of the sector in the third quarter, forecasting a drop in profits for only speciality chemicals producers Rhodia, Clariant and Akzo Nobel.
Deutsche Bank recently lowered its earnings per share (EPS) outlook for 2009 by over 10% for key industry players including Lanxess, Arkema, Rhodia, Clariant, Akzo Nobel and Yara, with material downgrades for several others.
The bank’s London-based chemicals analyst Tim Jones said the forecasts were not based on the ‘worst case scenario’ outcome for the current economic changes, saying a recession in all major regions could potentially cost at least 40% EPS for many players.
All Europe-based producers were expected to have their profits hit by negative currency effects in the third quarter.
Credit Suisse expected the impact of currency to vary considerably between producers. Linde and Rhodia’s profits were forecast to be squeezed by 6.7% and 6.4% respectively due to the weakening of emerging market currencies.
On the upside, the decline in crude prices should offer some relief to the sector’s raw material and energy costs from the fourth quarter.
Frankfurt-based Standard and Poor’s (S&P) analyst Tobias Mock forecast producers to show much better margins in the third quarter compared to the first six months of 2008.
“The substantial decline in oil prices will cut raw material costs for the industry in coming quarters,” said Mock.
“The doubling of prices in just 12 months from July 2007 to July 2008 put pressure on companies. In the third quarter, however, they managed to pass on a large part of the higher costs to customers, he said.
However S&P’s overall outlook was not so strong for the European petrochemicals sector overall, as it forecasted weakening global demand to push full year 2008 profits below 2007 levels, with further deterioration in 2009.
With many commentators predicting a downcycle for ?xml:namespace>
Recent events, however, could spell a historically weak fourth quarter for some of the more exposed players in the market.
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