25 March 2010 16:48 [Source: ICIS news]
By Nigel Davis
There has been no structural shift in pricing power, they argue. “Weakening prices and rising input costs make it likely that at least some of this gain will unwind,” they say in a recently released sector report.
Everyone talks about volumes these days, but JP Morgan Cazenove reckons the recovery is uncertain.
The bank’s volume index for European chemicals shows little subsequent improvement in the fourth quarter of 2009 after strong increases in the second and third quarter of the year. There may have been counter-seasonal trend growth for some in the period, but this does not appear to have been widespread.
The report warns investors that should volume growth begin to slow through 2010, as re-stocking gives way to a “more staggered” demand recovery, better cost control will not provide a major, sequential lift to margins and earnings. There will be few further earnings upgrades to buoy stock prices.
Product prices are under pressure, while raw materials and intermediates costs are rising sharply.
BASF reported an 18% fall in prices in the fourth quarter of 2009. The sector average, the bank says, was down 6% on the third quarter and 14% below the peak.
Also, volume output is still well down on peak levels – 7% below the long-term average and 20% below the most recent peak.
In the current environment, it is dangerous to assume too much. A couple of examples of tight markets and rising prices do not constitute a trend.
Plant outages, planned or otherwise, are having a great impact on markets where product volume flows are reduced.
Some companies seem to have made real market gains, but that strength is not widespread.
The decline in selling prices primarily reflects falling input costs, JP Morgan Cazenove says, so all is not bad. But these costs are increasing again.
“We anticipate raw material inflation of 5-8% for most of the European chemicals [players] in FY [full year] 2010 versus a decline of 8% in FY 09. The risk, therefore, is that low utilisation rates will act as an obstacle to firmer prices as competitors seek to fill idle facilities.”
The bank makes the valid point that nervousness remains over what constitutes new demand, rather than restocking after the brutal winding down of operations at the end of 2008.
Recovery to date has largely rested on refilling pipelines and restocking. So much of the demand pull has been underpinned by government incentive schemes that European companies understandably are concerned about the impact once these schemes are withdrawn.
There has been a significant improvement in operating rates; costs have been controlled but if volumes do stabilise as suggested, then margins will come under pressure. It will not be possible to pass on even higher raw material costs in a still relatively weak demand environment.
JP Morgan Cazenove picks out Air Liquide as a company that can make structural volume gains this year and next. It expects Linde to benefit from strong structural growth from new projects in the gases division.
It also likes specialties maker Croda, which operates in a diverse range of speciality end-use markets.
But players involved in cyclical businesses could have a tough time in the second half, particularly if
JP Morgan currently expects industrial production growth of 4.5% in the
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