INSIGHT: Holding tight as growth slows

20 September 2011 12:22  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Strong demand growth for commodities drove the performance of some of the largest companies in chemicals in 2010 and continued to provide momentum in the first half of this year.

And, surprisingly, despite deeply worrying macroeconomic uncertainty, companies continue to report relatively strong order books and levels of activity.

The polyolefins business is feeling the strain, as pointed out in Insight on Monday. Other segments of the industry, particularly those not protected by niche products, are also exposed. Yet despite such pockets of underperformance, many chemical producers are reporting as yet little company-wide impact.

“Overall, we were positively surprised by company trading conditions and sentiment, with minimal impact on business performance from the uncertain global macro environment,” Credit Suisse equity analysts said in a client note on Monday, referring to presentations at the bank’s Global Chemical and Agricultural Science Conference in New York last week.

“Demand is resilient across most markets: order books and activity levels are resilient except in construction and southern Europe,” they added.

“Most companies were quietly confident that current demand levels could be sustained through 2H [the second half] with lower customer inventory levels than 2008/9.” Input cost pressure was “moderating” in the third quarter.

Companies, then, appear to be managing a difficult situation extremely well. Volumes, and prices, look as though they will fall given much reduced expectations for economic growth in the second half of this year and, particularly, towards year-end. The eurozone debt crisis looms ominously over global sentiment, while the US struggles to grow.

But as yet, this is not 2008. “Hold on tight,” said Standard & Poor’s, also on Monday. “For now, our global outlook is more gloom than doom.” The US credit ratings agency said this before its analysts downgraded Italy’s sovereign debt on Tuesday.

“While the economic recovery will continue to be slow and painful, and prospects for growth are worsening, we believe the chance of falling into another recession remains slim,” the agency said.

Holding tight is as much the name of the game in chemicals as it is in other manufacturing sectors. Some fundamentals underpin the business – the price of oil, supply/demand balances, for instance. Managing business down in an orderly fashion will militate against the worst. Should markets panic, the going will be tough indeed.

The president of Dow Chemical’s Performance Plastics division, Howard Ungerleider, noted at the Credit Suisse event that his company had “positive exposure to fast-growing geographies”. The US firm has also fashioned a portfolio that is strong in some hopefully resilient segments such as agriculture, electronics and packaging.

The point about a diversified but chemically integrated product portfolio focused on specialties is that it should be better able to weather manufacturing industry storms. What 2008-09 proved was that when sentiment prompts a collapse in demand producers of essential industrial intermediates, be they commodities or specialties, all feel the pain.

Dow, alongside the likes of Germany’s BASF and US-headquartered DuPont, are all in the business of taking innovations to market.

Time was when the innovation had more to do with process technology (hence costs) than product technology. The world has turned, however, and today a constant flow of product improvements, made alongside the process technology changes, are the true drivers of differentiated corporate growth.

Pick your segment, perhaps, but play the process and product game to the max.

The three chemical players mentioned, and others, are striving to do this. The larger firms also tend still to be exposed somewhere to chemical commodities – although less than they were a decade or even five years ago.

The chemical commodities will take the hit if the price of oil drops markedly – as some commentators are suggesting it might. A collapse in demand will trigger something different.

But a demand slowdown?

Ungerleider suggested that Dow’s geographic and product spread was focused on growth and that its innovative potential is sound. The company continues to maintain – it has done so for many months now – that the ethylene up-cycle can continue, even in a low-growth scenario.

Chemical companies this year make money while they can but they are moving into difficult low-growth territory.

Read John Richardson & Malini Hariharan’s Asian Chemical Connections
Bookmark Paul Hodges’ Chemicals & the Economy


By: Nigel Davis
+44 20 8652 3214



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