INSIGHT: Next batch of results could be worse than expected

16 February 2009 16:56  [Source: ICIS news]

By Nigel  Davis

(Clarifies timescale in second paragraph)

LONDON (ICIS news)--In the midst of the fourth quarter reporting season, and at the onset of that period in Europe, it could be a time to take stock. This year, however, it will also be a time for clutching at straws trying to determine when chemicals markets might recover, and at what pace.

The broad economic news gets worse by the day. Japan’s economy shrunk a stunning 12.4% on an annualised basis in the fourth quarter, just released data show: the quarterly decline was 3.3%. The worst slowdown since 1974 in the world’s second largest economy was driven to a great extent by the slump in the US.

And the US outlook has worsened in 2009. Economists are more downbeat for 2009 now than they were last month. US GDP is expected to fall by 2% this year with industrial production down 7.2%.

That steep fall in industrial production will hit chemicals hard and few sectors will be immune. Japan, China and Korea are feeling the full force of the slump. Many US chemical producers have already registered the impact of the poor fourth quarter and extremely difficult December on earnings. They have charted the downturn in volume demand not just in North America but, significantly, in the developing economies.

European majors will report over the next few weeks.

The stories are likely to be similar - depressed European demand and a distinct drop in demand in emerging markets.

Production plants were run at much reduced rates or idled towards the end of the fourth quarter. December was worse than expected in November.

BASF CEO Jurgen Hambrecht reportedly described the chemicals outlook as “pitch black” in an interview published in the German press last week.

Only agrochemicals and the life sciences offer anything approaching real immunity from recession, other segments are only more or less recession-proof.

Industrial gases producer, Air Liquide, had a reasonably good story to tell on Monday – and the share price responded positively. The company did not reveal fourth quarter profits but said fourth quarter sales had risen – by 10.9% in Europe, 2.1% in North America and 4.1% in Asia.

The industrial gases and engineering group was hit by the downturn in its large industries segment in North America and in speciality gases, which are sold into the electronics industry in Asia. Given the downturn in steel production and the slump in consumer electronics that is hardly surprising.

Air Liquide has described the decline in gases demand in some cyclical sectors as “brutal” and in one of its scenarios for 2009 envisages a downturn in gases sales to cyclical industries of 30%. If there is a partial recovery in the second half the negative impact from cyclicals could be as much as 10%.

The company's balanced gases services portfolio, however, should ensure that sales grow even in this extremely difficult year.

Unfortunately, a balance in chemicals generally cannot guarantee much in the current environment. So many chemical end-use industries are hobbled in this recession, the impact is geographically widespread too.

In a note to clients, Credit Suisse warned that the results from the European chemicals sector companies it covers are likely to be poor and potentially worse than consensus forecasts in many areas. Having said that, however, low expectations from investors and the tone of outlook statements are likely to rule the day as far as stock prices are concerned.

Companies might be expected to be conservative in the extreme in their outlooks given the changing economic news and low business visibility.

Downstream or specialty chemicals makers will be benefitting from lower feedstock costs volume demand will have been key.

There is some evidence, but not necessarily among the group of companies left still to report, of some stock-rebuilding. Any reinforcement of the trend could indicate that some markets have seen bottom. That does not necessarily mean, however, that an upturn is imminent. Product markets can be expected to bump along the bottom of the downturn for some time.

As the major US producers have shown, this is the time to focus on cash and on protecting prize business assets. New battles for market share might be expected when signs of recovery are more widespread. In the near term chemicals sector players will continue to operate in self-preservation mode.

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By: Nigel Davis
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