INSIGHT: DSM grasps opportunities in downturn

02 June 2009 17:34  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--DSM has outperformed the European chemicals sector since December with its shares rising 51% in value, analysts at Credit Suisse noted at the end of last week. The sector average increase was 15%.

The outperformance is based on the company’s apparent strength in adversity.

The portfolio of this life sciences and materials firm has been shifted markedly in recent years away from upstream chemicals cyclicality.

True, it has been hard hit by the drop in demand for engineering plastics, polymer intermediates and some basic chemicals. But the nutrition and pharmaceutical side has continued to perform well.

DSM has a relatively strong balance sheet and management is cautious, although the strategy to shift towards advanced materials and life science products has been held firm.

The changed portfolio means that DSM is cushioned from the sharp downturn in auto, construction and electronics-related businesses.

The nutrition operations have stood up well during the recession. First-quarter nutrition segment profits were up 78%, while advanced materials, polymer intermediates and basic chemicals and materials were all in loss.

Credit Suisse believes that the “robust and stable” nutrition performance will be maintained over the medium term. The outlook for polymer intermediates, performance materials and the basic chemicals and materials businesses are understandably less clear.

DSM expects continued growth for Dyneema, the high-strength polymer, but engineering plastics and resins are under real pressure. Elastomers, melamine and the agro operation are all depressed.

Management is realistic and has declined to provide a quantitative outlook for the year. But even through the downturn it has been able to push forward the strategy to move further away from cyclicality and commodity-type chemicals.

Staying the course is clearly important and DSM appears to be doing just that.

Innovation and the introduction of new products remain high on the agenda. Recent activity, too, is noteworthy and shows what companies can do even in extremely difficult times.

On Tuesday, DSM said it was moving into the fast-growing biogas market and had agreed to buy Germany’s privately-held  Biopract GmbH.

The biogas market is said to be growing at 15-20% a year, and while Biopract won’t add anything noticeable to DSM’s sales, it gives the company potentially valuable enzyme-based technology.

Biogas can be used generate electricity and as a low-cost heating fuel. It can also be upgraded to natural gas quality.

Last month DSM said it would quadruple capacity for a new engineering polymer named under the Stanyl trademark.

Demand for the new halogen-free, flame-retardant, high-temperature polyamide is growing despite tough market conditions for engineering plastics generally. It is used in electronic devices such as mobile phones and computers.

In another recent move, DSM agreed to swap its Xantar polycarbonate business for Mitsubishi Chemical’s Novamid polyamide.

This neat move, driven as much by Mitsubishi Chemical’s desire to consolidate as anything else, gives DSM the chance to service Japanese domestic and overseas operations and others in the auto, electrical and flexible packaging markets. It also helps in consolidating DSM’s position as one of the top two global producers of polyamide engineering plastics.

DSM still has to agree the sale of its melamine, agro, elastomers and urea licensing businesses, but that effort has been slowed given the depressed global economic climate.

Inventors don’t like that uncertainty but should be encouraged by the way management appears to be actively looking for new growth opportunities and to consolidate operations in what longer term should prove to be the stronger parts of the business.

There may be limited upside potential for the stock given the strong performance through 2009 but management seems determined, and able, to continue to develop greater strength in depth.

For more on DSM 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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