FocusGlobal economic growth may boost Q4 chem results - analysts

11 January 2010 21:53  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS news)--The upcoming earnings season could reveal some genuine growth among chemical companies, as the worst of the economic crisis has passed, an analyst said on Monday.

Developing nations such as China, India and Brazil are showing real signs of economic growth, said Hassan Ahmed, co-founder of Alembic Global Advisors and previously the global sector head for chemicals research at HSBC.

The US has also showed some signs of growth, although Europe continues to bounce off of low numbers, Ahmed said.

A growing world economy should also boost margins among commodity producers, Ahmed said. Those margins should also benefit from idled plants.

In China alone, 22 ethylene crackers are going through turnarounds, he said.

US ethylene producers should benefit from advantaged natural-gas feedstock, Ahmed said. Typically crude oil and natural gas are on parity if the price ratio is 6 to 1.

Even given the recent increase in natural gas prices, that ratio is still about 12 to 1, giving natural gas producers a large cost advantage, Ahmed said.

In general, investors will be looking for more meaningful growth and not just higher earnings achieved mostly through cost cutting, according to a research note by Chris Shaw, an analyst with Ticonderoga Securities.

In previous quarters, companies relied mostly on cost cutting to boost earnings.

Among chemical producers, those serving electronics markets should post strong numbers, Shaw said. The electronics market benefited from a strong holiday season and customers restocking inventories, he said.

Albemarle, Air Products and Rockwood are all chemical producers that serve electronics producers.

Other companies should benefit from favourable currency exchange rates due to a weakening dollar, Shaw said.

Looking forward, Ahmed said producers may show new interest in mergers and acquisitions (M&A). Company valuations have bounced off of their lows, and profitability has shown signs of recovering.

"That has coincided historically with an improving M&A picture," Ahmed said.

In particular, Middle Eastern firms could acquire some businesses, he said. At the same time, companies are looking for buyers.

Dow Chemical has highlighted $2bn (€1.38bn) in assets that it wishes to divest this year, Ahmed said. "There will be more activity."

Already, RPM International and A Schulman have said they are looking for potential acquisitions.

The two companies - along with Mosaic - are among the handful that have already released earnings.

The US earnings season typically starts when Alcoa releases its earnings. On Monday, the US aluminium giant reported a net loss of $277m for its fourth quarter, which ended on 31 December. For the same time last year, Alcoa reported a net loss of $1.19bn.

The following table lists the quarterly net income reported so far by US chemical producers:

	Recent	Year ago
A Schulman	$17.0m	$8.2m
Mosaic	$107.8m	$959.8m
RPM	$55.9m	$41.7m

($1 = €0.69)

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By: Al Greenwood
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