INSIGHT: Business still looks volatile; opportunities thin

30 April 2009 18:26  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--“We think that our customers, the same as we, don’t have a clear view of the future. Their order pattern is very volatile: short term, small quantities. We cannot identify any clear trend.”

Those remarks, which were made by BASF CFO Kurt Bock during a conference call on Thursday with financial analysts, highlight this industry’s dilemma. Demand has popped up in some products and regions, most notably in China, but a sustained increase has proved illusory.

No wonder. The global manufacturing industry is gripped by recession. It has proved difficult to read what has been a fundamental loss of demand or what might have been a destocking effect.

There is more destocking to come in some sectors – the automobile industry is a case in point. That will be felt throughout entire value chains.

Bock used the Asia-based toy industry as another example. BASF sells a lot of plastics into the sector. “We have no clear view yet whether that industry will start producing again in Q2 or Q3,” he said.

Given the lack of visibility, it is hardly surprising that BASF is cautious in its outlook. But it also being particularly realistic.

The company does not expect any improved demand for its chemical products in the next couple of months. In plastics, BASF makes polyamide plastics and polyurethanes, among others; it expects the weak market conditions to persist, according to Bock, “for the foreseeable future”.

BASF's first-quarter results, released on Thursday, were surprisingly good, given the breadth and depth of the downturn. They show, some suggest, that the company has clearly moved away from cyclicality.

Here are its earnings: an operating profit down 58% at €985m ($1.3bn) on sales that were down 23% at €12.2bn. They show BASF in the vice-like grip of recession. The company has, though, managed to claw back costs and the operating margin is down 46% at 8.1%.

Compare that with the 81% slump in year-on-year operating margin at Dow Chemical, to 1.7%, and the portfolio differences stand out.

Dow's operating profits (earnings before interest and tax) from its businesses in the quarter were just $159m. These are two very different companies and reflect differing views on the recession from different product perspectives.

Still driven by cyclicality, Dow is trying – with the acquisition of Rohm and Haas – to move towards higher business added value and greater margin stability. It is under immense financial pressure, however, following that acquisition and its inability to secure an “asset light” joint venture with Kuwait’s PIC for many of its upstream petrochemicals and polymers assets.

Dow is cutting back hard and seeking to divest a broad spread of assets to help pay down debt.

Its different take on the downturn was apparent on Thursday when it talked of monthly volume gains for some businesses in 2009 and an uptick for some of the newly acquired Rohm and Haas product lines.

“The world is in a far better place than in December,” Dow CEO Andrew Liveris said, although he warned that recovery in Europe may be “farther out” than in other parts of the world, where government financial stimulus packages seem to be giving economies a lift.

Dow also believes that for many products, the inventory correction is essentially over. The operating rates of its plants have improved since the start of the year, it says, although there are still considerable volumes of capacity that it could take out as it seeks “right-sized manufacturing” though shutdowns and employee lay-offs.

The Rohm and Haas businesses that Dow is integrating into a materials segment had a miserable first quarter but electronics materials seem to be doing a bit better.

Dow has a tough job this year not simply battling with the recession, which Liveris admits will persist through much of the year, but also integrating Rohm and Haas. The big divestment programme will soak up a great deal of management time.

Yet Dow could emerge faster from the downturn than some given its exposure to consumables such as consumer packaging and agricultural film. Its businesses are pointing again to growth and, possibly an upturn, although it is too early to call that with anything approaching certainty.

The chemicals business is severely depressed and will remain so until large customer industries get back on their feet and begin to recover.

There is an underlying level of demand for consumables that (chemical) companies can meet (so long as the price is right). But a more fundamental return to growth still looks as though it is a long way off.

For more on BASF and Dow Chemical visit ICIS company intelligence
To discuss issues facing the chemical industry go to ICIS connect


By: Nigel Davis
+44 20 8652 3214



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