AkzoNobel’s warning signals difficulties for specialty chems – Moody’s

04 July 2011 13:15  [Source: ICIS news]

LONDON (ICIS)--AkzoNobel’s recent announcement that its earnings margin will be badly hit by further raw material price inflation could be a warning sign for other specialty chemicals makers, US credit watchdog Moody’s said on Monday.

On 27 June, Dutch-based AkzoNobel said last week its second-quarter results will be badly impacted by ongoing trading conditions and one-off factors and added that its margins have come under pressure owing to difficulties in passing a 20% year-on-year increase in raw material costs on to its customers.

The company also revised downwards its forecast for 2011 earnings before interest, tax, depreciation and amortisation (EBITDA).

“The margin pressure is credit negative for AkzoNobel and other specialty chemical producers as it raises questions over whether they can sustain their margins given that their input costs, commodity chemicals, will remain high while growth in some end-markets, such as construction, moderates, especially in Europe,” Moody’s said.

“Several specialty chemicals producers have said that raw material price increases affected their first-quarter margins,” it added.

Moody’s said that commodity chemicals producers have raised prices in order to hold on to the margins they enjoyed in 2010, while strong demand from emerging economies and the limited availability of certain feedstocks, including paraxylene (PX), cumene and propylene, have pushed prices to record highs.

“However, specialty chemicals producers have struggled to fully pass on the corresponding increases in their input costs to their customers, leading to margin erosion in the first quarter,” it said.

Moody’s said the most vulnerable specialty chemicals producers were ones with exposure to industrial applications with lower growth rates, including producers of water treatment chemicals, such as France-based SNF Floerger and US firm Nalco, both of which are sensitive to increases in polypropylene (PP) prices.

“Also exposed are coatings makers, such as AkzoNobel and [US-based] PPG, which are vulnerable to the rising prices of ethylene derivatives, paraxylene and titanium dioxide [TiO2], and producers of polyurethanes [PU], including [Germany-based] Bayer’s material science division, which have to contend with the run-up in benzene prices,” the credit watchdog said.

Moody’s said specialty chemicals producers with more robust end-markets, such as Dutch-based DSM and Swiss agribusiness firm Syngenta in food and feed production, and Germany-based Bayer’s life science businesses in care chemicals, are likely to fare better.

“Broadly diversified producers such as BASF are also likely to display greater resilience to margin pressures,” it added.

Looking ahead, Moody’s expects specialty producers to accelerate further price increases with their customers and to intensify the price increase versus volume growth discussions with commodity chemicals suppliers.

“We believe that the outcome of the price negotiations with commodity producers in Europe will depend on whether we will see more growth in Chinese demand in the autumn,” Moody’s said.

For more on AkzoNobel visit ICIS company intelligence

By: Franco Capaldo
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