INSIGHT: First Q2 results show business remains difficult

21 July 2009 17:50  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Markets remain depressed but there has been some price pick-up and sequential quarter-to-quarter volume gains in the hardest hit businesses.

SABIC’s second-quarter results, posted on 18 July, reflected the extent of the slump. Its net profits were down 76%, but at least it produced a profit compared with the first-quarter loss.

“Corporate income remarkably improved compared to the income in the first quarter of 2009 due to improvement in prices of some products,” the company said in a statement.

That was down to the price increases but also to the company’s ability to bring on stream new production capacities and maintain high utilisation rates at its existing plants. Its production volumes were up 1% year on year in the first half and the volume of products sold up 2%. 

Not every company is in that position as the upcoming results season will show. Most chemicals producers, upstream and down, have been forced to cut back production aimed at vitally important market segments like automobiles, construction and electronics. Many intermediates for industry and for some consumer-oriented products have been hit.

DuPont on Tuesday reported better-than-expected net profits for the quarter but its sales volumes remained depressed – 25% lower than in the second quarter of last year for some of its core products.

There has been a sequential quarter-to-quarter increase in volumes, even increases over and above the seasonal norm, DuPont says, but the news is not good.

Some financial analysts were surprised by the still-depressed volumes picture. They clearly did not expect as much of an impact from cost control.

Chemical producers of all sorts have produced surprises in this downturn. Even senior chemical industry executives had not reckoned on such rapid and effective responses on working capital. And at the operating level, producers have been running some plants at unexpectedly low levels of output.

Put together, the industry has responded well to the extremely difficult business and financial environment. The trouble is, they cannot let up. The cuts to inventory and working capital have had a positive impact but that will have to continue.

The improving global economic environment masks local regional difficulties. Manufacturing in most countries is still in the doldrums. As a major supplier to this segment of the economy, chemical companies continue to suffer.

The breadth as well as the continued depth of the downturn can be seen in the DuPont results. The profits from its so-called growth platforms were miserable, apart from agriculture and nutrition. Sales in the coatings and colours segment were down 26%, electronic and communications down 26%, safety and protection sales were 37% lower and performance materials sales were down a challenging 40%.

DuPont is running a tight ship. Lay-offs were announced early on. The company has cut costs by about $600m this year already. Capital spending has been halved.

A company like DuPont builds inventory before demand reaches a seasonal high, but this year the related build in working capital was 40% less than last year. This is due to $1bn in inventory reduction compared with June 2008. Some two-thirds of this can be put down to productivity projects and projects directed at inventory management.

There can be no let up. Analysts may sense better times ahead, but industry has yet to feel the balmier breeze or register its impact. Moving into a slower seasonal period, they will continue to be hard-pressed – and hard-pressed to register the first sings of the (economic) upturn.

Productivity and inventory management programmes, while never easy to implement, will stand some companies in good stead. They have to be prepared for the upturn but are unlikely to have to respond just yet.

For more on SABIC and DuPont 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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