INSIGHT: DSM suffers on exposure to downturn

27 October 2008 16:51  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--European chemicals shares had a rough ride on Monday as fears of a global recession continued to hit home.

As they release third-quarter financial results and talk more about the full-year outlook, chemicals makers are explaining just how they see the wider world. The view they reveal looks as though it will be difficult to negotiate to say the least.

DSM on Monday called the combined impacts of the credit crunch “unprecedented”.

It spoke of the low availability of credit, a strong decrease in demand in certain end-markets, a strong drop in oil prices, increasing currency volatility and anticipatory behaviour in downstream industries.

These factors have led the Netherlands-based life sciences and materials player to trim back its full-year profits forecast - it only increased the target to just over €1bn ($1.25bn) in September.

The market on Monday didn’t like that - and investors clearly didn’t like what they were hearing about the industrial slowdown in Europe and farther afield.

Since September customers in some markets have been destocking and production plants have had to be turned down. The rapidly falling price of oil has also forced many chemicals prices sharply downwards.

DSM says it has had to close some manufacturing units in the face of the tough market conditions to reduce its own inventories. It is telling it like it is.

The company makes resins and advanced materials that are widely used in the parts of the economy most exposed to a downturn.

A test for it, therefore, will be the extent to which the portfolio has been shifted towards business, such as health and nutrition, which might be expected to be less affected when times get hard.

DSM has been on this path for some years now and pushed harder into vitamins and the life sciences while developing its high strength and other advanced materials.

It says that more than half the current portfolio is less sensitive to an economic downturn. When the company is able to sell the parts of base chemicals and materials segment - melamine and other businesses which have been on the block for some time now - about 50% of sales will be in nutrition and pharma.

The exposure for DSM, however, is very real and analysts continue to raise concerns about the vulnerability of the high-strength materials operations that are so important to the company.

About 25% of the company's performance materials sales last year were in construction, 16% in transportation and the automotive sector, 15% in electronics and 9% in packaging. Each of these end-use markets are affected by the economic cycle to some extent.

DSM Engineering Plastics sells into the electronics, transportation and packaging markets but the company expects food packaging to be affected only to a limited extent in a downturn.

The resins business is exposed in transportation, building and construction. Growth in the Dyneema, high strength fibre business, DSM says, relies mainly on new applications replacing existing materials and is to a great extent independent from the economic cycle.

Polymer intermediates are sold into textiles, building and construction, and into transportation end–use markets

Also of concern has to be the fact that DSM says the slowdown is being felt in most regions.

It is apparent in the US and in Europe in automotive, building and construction and electronics, and is being felt now in the engineering plastics, resins, fibre intermediates, elastomers and, to a lesser extent, melamine businesses.

In the circumstances, tighter cost controls are expected and DSM says a number of measures are in place to improve cash flows. Tight credit risk management and credit controls have been applied in accounts receivable to prevent increasing payment terms and insolvency losses, it says.

DSM had had a strong 2008 and if profits hit the full-year forecast will be some 20% over the proviso record. The future, however, remains highly uncertain, the volatility of the world’s stock markets on Monday being witness to that.

By the late afternoon in continental Europe on Monday the firm’s shares were trading down around 14% on the day.

Over the past three months they have dropped in value by 25.7% compared with a 36% decrease in the Dow Jones EU Stoxx Chemicals index. This index was down about 6.5% on Monday.

For more on DSM's portfolio and strategy visit ICIS company intelligence
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By: Nigel Davis
+44 20 8652 3214

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