FocusRepeat of 2008 collapse unlikely for chemicals

15 August 2011 22:43  [Source: ICIS news]

Bull and bear collapseBy Joseph Chang

NEW YORK (ICIS)--The chemical sector is unlikely to suffer a severe downturn similar to the collapse in demand and pricing seen in 2008–2009, Wall Street analysts said on Monday.

“Many investors… are fearing a 2008-like volume environment. We would remind investors that [the fourth quarter of 2008] was a period when the Baltic Dry Shipping Index was down 90% – essentially implying global trade had virtually frozen,” said Hassan Ahmed, analyst at US-based research firm Alembic Global Advisors.

“Additionally, we entered the second half of 2008 with bloated chemical inventory levels on the back of Chinese traders aggressively pre-buying ahead of the Olympics – a situation quite different from today when the industry has already substantially destocked already,” he added.

The analyst contends that with US commodity chemical stocks down about 37% from their highs, investors have already discounted a “worst-case scenario” similar to a year-on-year volume decline of 25%, an ethylene price fall of 20% and flat ethane feedstock costs – a scenario he deems unlikely.

Laurence Alexander, analyst with US-based investment bank Jefferies & Co., has cut 2012 earnings per share (EPS) estimates on chemical companies across the board, but still expects profit growth versus 2011.

He noted that leading indicators “suggest downside risk to 2012 consensus, consistent with a ‘soft patch’ rather than a global recession”.

“With some belt tightening in supply chains likely, we are trimming estimates… With fundamental data points still favorable and macro indicators weak but not dire, we forecast 11% EPS growth [in 2012] for our coverage universe versus 17% consensus,” Alexander said.

Analysts at US-based investment bank First Analysis surveyed specialty chemicals companies under coverage to determine to what extent they were seeing signs of a downturn or a “double-dip recession”.

“With rare exceptions, our covered companies had assumed a low-growth scenario in 2011, so concerns about weakness or a prolonged ‘soft patch’ are essentially in line with their forecast,” said analyst Steven Schwartz.

“Most companies indicated volumes are holding up and customer order patterns are unchanged. Many companies are not yet to pre-2008 downturn volume levels, and noted that even if we were to see a recession, they would expect it to be much less drastic than the plunge we saw in 2008–2009,” he added.

From an overall industrial markets perspective, there were encouraging signs from the Jefferies 2011 Global Industrial and Aerospace & Defense Conference that took place from 9–11 August.

The conference included 160 industrial companies.

“For the most part, June–July trends appear to have extended into August, with little, if any, material deterioration in order patterns,” said Alexander.

“Companies that have businesses that tend to lead the way into downturns confirmed that they still have not seen any fundamental shift in order patterns to warrant a more cautious stance,” he added.

Any downturn would likely be mild because of low inventories overall, already cycle-low activity in certain markets such as construction and financial factors including strong balance sheets and low borrowing costs.

“Most corporates argued that any downturn would be more like a dip, rather than a crater,” said Alexander.

“Additionally, raw material relief should start to support results by Q4,” he added.

The chemical sector itself is better financially insulated against a severe decline, pointed out Alembic’s Ahmed.

“Relative to 2008, US chemical companies have cleaner balance sheets today – Q2 2011 average net debt to capital of 36% versus 66% in 2008 with only 11% of debt maturing in the next two years as compared to 22% in 2008,” he said.

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


By: Joseph Chang
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