INSIGHT: Europe majors can bank on only slow and uneven recovery

26 February 2010 17:13  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Hardly good news on the chemicals front this week.

BASF on Thursday said it would cut its dividend, for the first time in 16 years, and Bayer on Friday showed that it had underperformed market expectations following, among other things, a still weak performance from its MaterialScience sub group.

Bayer’s shares suffered on Friday, falling back while the German market showed some growth. BASF made gains on Thursday despite the dividend announcement and on a relatively muted outlook.

The underlying message from both companies was that in manufacturing it is still tough out there.

Chemicals producers - BASF has a uniquely broad product portfolio, Bayer focuses on polycarbonate and polyurethanes - remain tied to downstream industries such as automotive, electronics and to sectors like construction that in most parts of the world are only slowly recovering from the global economic slump.

China is the exception. Both companies have secured a strong foothold in the country and are clearly benefiting from rapid post-depression growth. Yet year on year, elsewhere their most exposed businesses are still in the dumps.

BASF’s chemicals businesses have stabilised and fourth quarter volumes were higher compared with the extremely weak fourth quarter of 2008.

Demand rose again again in petrochemicals and intermediates but the most recent quarter’s outturn reflected the battles that are being fought on prices.

Petrochemicals earnings were lower than in the third quarter of 2009 also because of increased supply. The industry continues to gear back up to supply downstream markets but demand growth is not strongly supported by consumer markets.

BASF’s polyurethanes business seems to have stabilised and demand for performance polymers has grown particularly strongly in Asia. Sales growth in the company’s performance products businesses has been driven mainly by consolidation of the former Ciba Specialty Chemicals businesses.

Construction chemicals were weaker but catalysts and coatings turned in a stronger performance driven by recovery in the automotive industry. The business environment in the automobile industry has stabilised, BASF says, but in the fourth quarter of last year there was no appreciable recovery in construction.

Bayer is a rival in polyurethanes and said on Friday that while it had seen growth in methyl di-p-phenylene isocyanate (MDI), toluene diisocyanate (TDI) and polyols volumes it had been hit by strong year on year price declines. Higher volumes also compensated for lower prices in polycarbonate. Asi-Pacific is driving the volume recovery.

“We anticipate a continuing recovery in the markets relevant to our MaterialScience business,” Bayer told investors on Friday.

“In light of this we aim to increase sales by more than 10% on a currency-and portfolio-adjusted basis in 2010,” it said, and it is targeting a substantial increase in underlying operating profits from the sub-group.

First quarter 2010 profits, however, are likely only to be on a par with those of the fourth quarter of 2009 because of higher raw material costs. Sales should be higher.

“Provided the economic recovery continues, we expect MaterialScience to return to its pre-crisis sales level of more than €10bn [$13.5bn] by 2012,” Bayer said.

“Provided the economic recovery continues” is the telling phrase here. The global economy only recovered slightly in the second half of last year. BASF said on Thursday that it expected a “slow and uneven” recovery.

The risks to growth are associated with overcapacities, the winding down of national stimulus programmes and rising unemployment, especially in Europe for BASF.

It is planning on chemical industry growth in 2010 (excluding pharmaceuticals) of 5.3% and an average oil price of €75/bbl. On a positive note, it believes that there could be opportunities if customer industries recover more rapidly than expected and re-stock.

Most downstream sectors from chemicals currently are living from hand to mouth and are hardly in the mood for re-stocking.

In an environment where cash is still king the recovery can only be expected to be slow at best. The hope should be that it is relatively steady.

($1 = €0.74)

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By: Nigel Davis
+44 20 8652 3214

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