UpdateQ1 earnings season starts on strong note for US chems

12 April 2010 22:49  [Source: ICIS news]

Earnings season starts(adds details throughout)

HOUSTON (ICIS news)--US chemical companies are likely to report impressive earnings during the upcoming first-quarter earnings season, which started on Monday.

However, the outlook for chemical companies remained cloudy beyond the first half of the year due to the uneven pace of the recovering US economy.

During the first quarter, US companies benefited from cheap feedstock based on natural gas, which allowed them to successfully compete in international markets, said Hassan Ahmed, head of research for Alembic Global Advisor.

The US maintained its feedstock advantage even while crude oil prices continued increasing during the first quarter, he said.

"With the massive disconnect between crude and natural gas prices, the US industry becomes an export-oriented chemical industry," he said.

In addition, chemical companies benefited from customers restocking their inventories, which they had purposely depleted during the recession, he said.

In addition to restocking, rising demand also drove sales, Ahmed said.

"The real question: Is this demand growth sustainable?" Ahmed asked. For the second half of the year, there was no clear answer, he said.

"Most companies are going to take a conservative stance when they give guidance," he said.

Despite an expected solid first quarter for the US chemical sector, Jefferies & Co analyst Laurence Alexander said that investors should shift from an optimistic to a neutral stance on the group.

“Some broad leading indicators [like the composite leading indicator for the Organisation for Economic Co-operation and Development] are starting to form ‘candy canes’ as short-term momentum fades,” Alexander said in a research note.

The analyst said upward earnings revisions “may crest this quarter, leaving the sector vulnerable to any downturn in growth indicators or shifts in the credit markets or commodity volatility that might also impair longer-term growth prospects.”

Alexander said he favours a mix of secular growth names due to end-market mix and pricing power. Alexander also pointed to companies that combine ongoing structural improvements with operating leverage to benefit from a global recovery.

The US earnings season traditionally starts with Alcoa, the first company in the Dow Jones Industrial Average to release its earnings.

Alcoa reported a first-quarter net loss of $201m (€149m), up from a $497m net loss reported for the same time last year.

Alcoa attributed its most recent first-quarter loss to $295m in charges connected to old shutdowns, the new federal healthcare laws, power outages and special items.

CEO Klaus Kleinfeld said Alcoa's markets were gradually improving, and trends in both policy and consumer sentiment bode well for the company.

“Just a few days ago, the US finalised new rules that require increased fuel efficiency and for the first time set greenhouse gas emissions standards for cars and light trucks," Kleinfeld said in a statement.

"In addition, a growing number of customers are requesting sustainable products," he said. Such factors play to aluminium's advantages.

While Alcoa marked the start of the earnings season, several companies have already released their earnings.

Among chemical producers, those included HB Fuller, A Schulman and RPM International.

PPG Industries will release its earnings later this week.

($1 = €0.74)

Additional reporting by Joseph Chang

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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