INSIGHT: Costs hit some chemicals makers hard as markets weaken

22 July 2011 16:48  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The start of the second quarter results season has highlighted rising concerns about costs and growth across the chemicals sector – along with some clear mid to long-term opportunities.

The opportunities lie in what the industry does – supplying the products and materials that make life better. The concerns are more about global economic uncertainty, and how difficult it might be to weather not simply the second half of this year, but future quarters.

AkzoNobel CEO Hans Wijers warned at the start of July about rising raw material costs – 20% higher in the second quarter than a year ago for this maker of paints, coatings and some specialty chemicals – and the impact of economic uncertainty.

Still, high-priced oil, rising inflation and a weighty debt burden in the US and Europe all are a drag on growth.

Wijers, a former economics minister in the Netherlands, sees this clearly.

“This is a very volatile world, with very little visibility, and there are scenarios which are of course very scary,” he told a press conference on Thursday.

Netherlands-headquartered AkzoNobel’s decorative coatings business is finding it particularly hard to lift prices and sales in weak developed world markets. The squeeze from the higher cost of chemical raw materials is acute.

Other paints makers reported a similar story this week, although US-headquartered PPG controlled costs aggressively in the quarter and, with a chemicals business boosted by high caustic soda prices, managed to buck the trend.

Sherwin-Williams, of the US, talked of soft demand for paints in the domestic market, as it produced profits at the low end of earlier guidance. High raw material costs continued to have a negative impact on the business, alongside lacklustre demand. Raw material cost rises in the second quarter were around 20%. It could be the first half of next year before product prices catch up.

Paints and coatings are needed but not necessarily essential, while farmers have to apply fertilizer if they want to maintain crop yields.

The increase in demand for grain is underpinning that of nitrogen fertilizer, CEO of Norway-based Yara, Jorgen Ole Haslestad, said on Tuesday.

Global agricultural markets are strong, he added, with the Food and Agriculture Organization (FAO) food price index up by 39% from June last year. The US Department of Agriculture estimates that global grain stocks-to-use will decline in the coming 12 months, despite a 3.7% production increase.

A greater acreage of land under cultivation requires more nitrogen fertilizer, while the diversity of planting and the need to make land more productive heightens the need for phosphorus and potash.

PotashCorp executive Stephen Dowdle suggested this week, for instance, that there is a tremendous opportunity to improve crop yields in India using balanced fertilizers.

His company believes that global potash consumption this year could rise by more than 12%, compared with 2010.

"With one in seven persons in the world undernourished, most of these in Asia and Africa, we will have to do a better job of producing food,” he added.

The world’s fertilizer producers are benefitting from increased global demand. Nitrogen fertilizer producer Yara reported a 34% increase in underlying net profit in the second quarter. Revenues were up by 19%.

Stronger demand for phosphates helped drive net profits for US-based Mosaic up by 64% in the company’s fiscal fourth quarter, which ended on 30 June.

For fertilizer producers it is very much a question of getting the operating model right, to help service increasing global demand. Companies need access to raw materials – minerals or gas – and, increasingly, global reach.

Now, however, the makers of chemical specialties are feeling the pain. US firm Cytec, for instance, reported net profits for the second quarter on Friday, down by 43% compared with the same period a year earlier – the fall due largely to the higher cost of raw materials.

Cytec achieved volume growth of only 1% in the quarter, and experienced some weakness in demand in industrial markets towards the end of the period.

It is expecting raw material propylene prices to remain high in the remainder of the year.

“We are now faced with the uncertain pace of global economic recovery, persistent high unemployment, fiscal constraints in the developed economies and inflationary concerns in the emerging markets,” Cytec's CEO, Shane Fleming, said.

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By: Nigel Davis
+44 20 8652 3214

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