25 January 2010 00:00 [Source: ICB]
BEFORE THE 2009 third-quarter (Q3) results season, analysts were expecting relatively muted optimism from companies that were reporting. They weren't disappointed.
|Rex Features/Chris Eyles|
|Effective cost cutting in 2009 will play a large part in chemical company results for this year|
For producers, upstream raw material prices have continued to rise, putting further pressure on margins. Demand is not great, although much better than a year ago, when it was down by more than 25%. The Q4 year-on-year comparisons on sales and profits are almost bound to look good given the slump at the end of 2008.
Any encouragement is likely to be gained from demand growth through the 2009 quarter. There is limited evidence for that: the suggestion from the American Chemistry Council's economists at the end of last week, for example, was that if December was not a complete disaster, the second half of 2009 will not look at all bad.
The production of polypropylene (PP) and polyethylene (PE) in North America held up well in the year to November, giving weight to the assertion that the industrial recovery has been maintained. Generally, business may not be great, but it is better.
Producers one and two steps downstream from the cracker are likely to have benefited from some demand growth, driven largely by Asia. Their challenge through Q4 2009, and clearly at the start of 2010, is to manage considerable increases in raw material prices.
Dutch chemical group LyondellBasell Industries' monthly report for November illustrated the fragility of the upturn. The company's chemical earnings were down by 62% from October because of raw material cost volatility and the expected seasonal drop in demand. A sharp downturn in polyolefins profits was largely a result of weaker business in Europe, which was unwelcome, although probably predictable. It came also despite further cost cutting.
Exports have been driving the US polyethylene (PE) business and continued to do so for LyondellBasell in November. They are likely to underpin the business at the start of 2010. Toward the end of 2009, companies continued to work to balance output with demand, and the sequential Q3-to-Q4 results comparisons are likely to be relatively muted, particularly given the expected seasonal slowdown.
Companies survived in 2009 by cutting costs and inventories to better reflect demand. The effectiveness of that cost cutting will play a large part in results for the quarter, and particularly for the year. It depends on how difficult it has been to keep costs down.
The quarterly outturn for producers downstream from the major petrochemicals will better reflect the strength of end-use demand. Companies in these intermediates and specialties segments also have yet to face the full impact of the pass-through of higher crude oil-based raw material costs.
Few executives in this results season are likely to be willing or able to make bold predictions. In particular, uncertainty in raw material prices couples with the supply/demand environment to cloud the outlook.
Last week, an updated report from US credit ratings agency Moody's Investors Service on Europe, the Middle East and Africa highlighted the underlying concerns about the recovery in chemicals.
Its outlook remains negative, reflecting its concerns about the strength of the recovery and the expectation that raw material prices will increase before a meaningful increase in demand materializes for most companies.
"The outlook also reflects our view that low utilization rates, weak selling prices and other factors are likely to squeeze producers' margins and cash flows over the near term," it added. The slow recovery is likely to continue after two consecutive quarters of growth in 2010, Moody's says. Minimal economic growth in Europe and modest growth in the US in 2010 will drive the pace of the recovery. But it warns that any unanticipated event that stalls the recovery in industrial production will hit chemicals hard.
"Also, the weak demand and modest recovery will not give chemical companies much opportunity to pass on increases in the cost of raw materials," Moody's said.
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