INSIGHT: Good Q3 earnings to also reflect sequential weakness

05 October 2010 18:41  [Source: ICIS news]

By Nigel Davis

BUDAPEST (ICIS)--Chemical and petrochemical players will report healthy third-quarter earnings, according to many of them.

Demand in Europe and the US has seen to that, which, alongside the strong comparable pull from China, has helped to raise sales revenues.

Prices also have held up remarkably well, with some supply chains particularly tight.

Producers have cut costs, of course, and it is that cost containment that is helping feed cash through to the bottom line.

There is also more money available for some of the growth projects that were put on hold as the recession loomed. More of them will be dusted off in the coming months.

Pull-through demand from the durable goods markets in the US and Europe has increased, as has the output of intermediates, which had to be cut back so sharply towards the end of 2008.

Alongside strengthened demand in Asia for polyolefins, the talk is of margins that might be expected in the top half of the cycle compared with those from 2009.

Most noteworthy perhaps is the air of confidence. Having ridden out the worst of the precipitous downturn, it looks as if healthy returns can be made under current market conditions.

The management of supply to demand over the next three years will be vitally important when it comes to retaining margins.

No one can be complacent, however. The business environment has changed markedly. The undercurrents of change have been amplified by the crash of 2008.

The focus of activity in chemicals has shifted eastwards, the consequences of which are being felt everywhere.

Companies operating in Europe are consolidating to some extent but in particular they are regrouping.

While cuts have been made in the US, it is the opportunity presented by potentially much lower long-term gas feedstock costs that excites.

But what about Asia?

As was discussed in a recent Insight piece, demand growth in China, India and other emerging markets continues to be impressive. This has produced percentage increases from much bigger bases, even though the rates of expansion might have slowed down this year.

It is the sheer size of these markets now that grabs the attention. Changes in demand growth from them affect all players.

Petrochemical markets in Asia in the third quarter, however, were under pressure on a sequential quarter-to-quarter basis, according to the latest margin analysis from consultancy Nexant ChemSystems.

“Weaker Asian markets in the third quarter have raised fears that the recovery of the petrochemical industry could falter or even worse fall back to a trough, surrendering recent gains,” suggests Nexant.

Petrochemical margins in western Europe in the quarter were almost 15% above the average of the past two decades, even though operating rates were confined to below 85%, according to the firm’s data.

The profitability of US petrochemicals fell by almost 30% in the quarter, the numbers show, but it remained above the long-term average because of the access producers have to the low-cost feedstock ethane.

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By: Nigel Davis
+44 20 8652 3214

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