INSIGHT: Producers retain some confidence following the soft patch

29 July 2011 17:23  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--BASF on Thursday delivered a “reality check” to the markets, according to one chemicals analyst. Hit by one-time events, the company’s second-quarter results also reflected a wider industry trend.

While chemicals volume demand has improved in Europe and in North America the pace of growth in China has slowed - the impact of de-stocking in the second quarter as customers held off buying in the expectation of lower prices in the second half. 

The volume surge that accompanied re-stocking across multiple chemicals markets has all but come to an end and chemical company operating rates are approaching pre-recession, 2008 levels.

Commodity producers have been adept at passing on higher raw material and energy costs but better supply/demand balances have been struck in other, more higher added-value, markets too.

Certainly, players have reaped the rewards of higher prices although the Europeans have suffered from adverse currency effects.

Continued focus on tighter inventory management and on costs has helped maintain margins sequentially from the first to the second quarters. The comparisons with the equivalent 2010 periods look very good.

But companies worldwide have registered their concerns about second-half growth. On the one hand there is the understanding that recent rates of quarter-to-quarter growth are unsustainable. On the other, there are deep concerns about the global economy and the price of oil.

BASF’s earnings are constrained by lost oil production from Libya but the company is also adversely affected by higher feedstock costs which it may not always be able to pass on.

“BASF continues to view the economic outlook as positive for the second half of the year, but expects growth to be less dynamic, as could be observed towards the end of the second quarter,” executive board chairman Kurt Bock said.

“The economic risks remain: We continue to be concerned about the development of the euro as well as the debt situation in some European countries and the United States. Added to this is the persistently high oil price, which is having a negative impact on margins across our value chains and is leading to some customers being more cautious in their orders.”

The BASF view on chemicals production growth this year is fairly widespread, predicting global production growth of between 5% and 6%. The company notes, however, that growth rates can differ “considerably” from region to region.

It is the loss of growth in rapidly expanding markets that should give most cause for concern. Not surprisingly companies from North America, Europe and elsewhere are doing much more business in China and in the emerging markets of Latin America and Asia. If China’s demand for chemicals and polymers slows then the impact can be severe.

Asia-Pacific sales for Bayer’s MaterialScience businesses were down 8% year on year in the second quarter. Its North America sales were down 6.6%.

Across the business, sales were up 3.5% but volumes were down 1%. A significant expansion of volumes in Europe did not compensate for demand-related declines in Asia Pacific and North America, the company said.

Volume demand for toluene di-isocyanate (TDI) and methyl di-p-phenylene isocyanate (MDI) was down. Bayer talked of a “marked decline” in volumes for polycarbonate granules in Asia Pacific, the Middle East and Africa.

The big industry players in North America have shown somewhat stronger earnings in the second quarter but revealed little about weaker China demand in the quarter.

“Emerging geographies collectively posted volume gains nearly double that of the total company,” Dow Chemical said on Wednesday 27 July when it pointed to the strength of demand in the period for its electronic and specialty materials, health and agricultural sciences, and high-end, differentiated plastics in the fast-growing economies.

This illustrates the changing nature of Dow as it fully absorbs the former Rohm and Haas specialty materials businesses and as its portfolio continues to be oriented towards higher added-value and less cyclical chemical products.

Indeed, companies that are well integrated and that are operating in some of these more sophisticated end-use markets are less exposed currently to the winds of change, although the headline numbers for Dow show that volume growth in the quarter was strongest in North America (11%) and Europe (8%) and weakest in Asia-Pacific (5%).

Dow Chemical CEO Andrew Liveris said this week that his company now has 70% of its ethylene production located in feedstock cost-advantaged regions. He made the point that integration underpins the company’s “transformed” portfolio.

LyondellBasell CEO Jim Gallogly said on Friday that the fundamentals that underpinned his company’s strong performance in the second quarter are expected to continue for the foreseeable future.

"Specifically, we continue to benefit from the favourable ratio of US natural gas prices to crude oil prices. The flexibility within our assets makes us particularly well suited to benefit from this environment.  Additionally, our Houston refinery's ability to process discounted heavy crude oils further enhances our favourable position,” he added.

"The Chinese polyolefins market is giving indications that it is recovering from its soft patch and although US and European polymer markets are still adjusting to this disruption, we are entering a period of significant industry maintenance. Since our key US maintenance projects have been completed for the year, we should be the beneficiary of tightened supply/demand conditions and any opportunities that this may create," he said.

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By: Nigel Davis
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