INSIGHT: Vitamins can give some players a lift

16 January 2009 15:31  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The best place to be in chemicals in this downturn is understandably not simply close to the consumer but close to the most recession-proof end-use markets.

Health and nutrition spring to mind. Then there are specific segments such as acetate tow, the filter material for cigarettes. There will be parts of the agrochemicals business that stand up better than others while the segment takes a turn down on lower biofuels and fertilizer demand.

Time was that consumer chemicals of all sorts were attractive but the outlook for this broad-based group of chemicals is mixed. Luxury product sales are under pressure, so demand for certain products will shrink.

But money will continue to be spent on consumer essentials and there is still growth to be had in the developing world economies.

In some respects the same can be said for most life science businesses, including vitamins and nutrition.

The pharma intermediates business is probably in a class of its own and certainly driven by significant global competitive trends. Producers of fine chemicals for pharma and the operators of custom chemicals facilities continue to be threatened by low-cost competitors alongside price pressure from their customers in the drugs business.

Vitamins and other nutritional products may not be entirely recession proof but they are shielded from the worst that this downturn can hurl at them. Producers in the West have faced severe price pressure in certain vitmains markets in recent years but many of these problems have been worked through the system. So in tough times, probably a good place to be in European chemicals is in vitamins and nutrition and in certain pharma supply areas.

Analysts at Credit Suisse made the point this week in a note on the life sciences and materials producer DSM. Not always the most attractive company to investors, DSM is drawing more attention as the bulk of the specialty chemicals sector slips into a trough.

The Netherlands-based company is being hurt by the downturn in its materials segment but nutrition does appear to be holding up well. Its strategy over many years has been to focus on the life sciences, on high strength materials and on product lines that have a high technology or innovation content.

The strategy’s strength was highlighted last year. In its third quarter report, DSM said that it had sustained strong profitability in nutrition while the accelerating downturn was visible in materials. There had been some slippage in the pharma-related businesses largely related to the loss of major contracts.

Volume growth for nutrition was constrained in the quarter but that reflected its policy to prioritise value over volume, DSM said, coupled with some general de-stocking.

“Nutrition is clearly benefiting from its successful differentiation and innovation strategy in vitamins, which is being amplified by the changing dynamics in the industry,” it added.

And Credit Suisse suggested that, based on discussions with players in the vitamins industry, it seemed as if the DSM nutrition business was bearing up well under the current macroeconomic pressure.

In 2007, 37% of DSM’s sales came from the Nutrition and the Pharma segments of the portfolio. The bank's analysts do not expect a repeat this year of what they call the “stellar performance” of the business in 2008, yet they believe it should prove to be “significantly more robust that the wider specialty chemicals industry”.

DSM should feel, if not pleased, then relatively confident. Its acquisition of the Roche vitamins business in order to boost this segment was not at the time widely applauded. But it did help push the company into areas of business that are proving to be more recession proof than so many others.

The company issued a profits warning on 15 December, when it estimated that 2008 operating profits would only be 10% higher than in 2007 at more than €900m ($1.18bn). In October its full-year profits forecast had been €1bn but it expected later in the year an adverse impact of between €50 and €100m from a decision to focus on cash generation and from negative inventory adjustments.   

It gave details then of new cost control measures including further job cut-backs. Alongside so much of the chemicals industry, it had been forced to idle production plants. Fibre intermediates, engineering plastics, plastics resins and some base chemicals and materials were the worst affected.

Nutrition, however, and the high strength Dyneema fibre business were holding their own. Neither business is immune from the downturn but DSM said they had been relatively unaffected by the current economic circumstances.

($1 = €0.76)

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By: Nigel Davis
+44 20 8652 3214



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