OUTLOOK '12: Europe chem producers face financial headwinds

30 December 2011 11:30  [Source: ICIS news]

By Franco Capaldo

Europe chem producers face financial headwindsLONDON (ICIS)--The year started brightly for so many European chemical companies but good times were short-lived as earnings were battered by a turbulent economic climate and the continuing eurozone debt crisis during the second half.

In the third quarter of 2011, petrochemicals market sentiment deteriorated significantly as fears of a ‘double-dip’ recession hung over the heads of investors, and there is a strong chance that this bleak scenario will continue to cast a shadow on the performance of Europe's top chemical producers in 2012.

Consulting firm Nexant’s petrochemical and polymer margin index for Europe dropped by more than 40% in the third quarter from the first-half average as demand stalled. Nexant said the third quarter had seen a dramatic change in fortunes for European petrochemical producers, with average profitability across the industry collapsing to its lowest since the global financial crisis took hold at the end of 2009.

GDP forecasts also continue to be slashed by a number of government organisations and trade associations. The European Commission cut its 2012 eurozone growth forecast to 0.5% from 1.8% as the EU's economic recovery ground to a halt. The commission said that since the summer of 2011 the outlook had taken a turn for the worse, warning that a new recession is a possibility.

VCI, a trade group of Europe’s largest chemical producer, Germany, forecast the country’s chemical production will increase only by 1.0% year on year in 2012 compared with 2011, which is set to grow 4.0% year on year.

Klaus Engel, the president of VCI and CEO of specialty chemicals major Evonik, said that it will be difficult to make an accurate forecast for the coming 12 months as the unresolved government debt crises in the eurozone and the US continue to cause increasing uncertainties among customers and producers.

A big cause for concern among European producers is that demand from key end-users of the chemical industry, such as the automotive and construction industries, was slowing down at the end of 2011 and will continue to dip in 2012.

New registrations for passenger cars in the EU (excluding Cyprus and Malta) from January to October fell by 1.2% compared with the same period last year, according to data from the European Automobile Manufacturers’ Association (ACEA), while data from statistics office Eurostat showed that EU chemicals and industrial production fell in September as the economic slowdown began to bite. EU chemicals production was down by 1.0% in September compared with August, with a 1.2% decline in the 17-member euro area.

For many of Europe's chemical companies to stand a good chance of reporting strong earnings in 2012, they will have to make sure they manage to pass over higher raw material costs successfully, keep a healthy balance sheet and in some cases restructure underperforming parts of their portfolio to strengthen competitiveness, which could mean a sway of job cuts throughout the year and possible industrial action.

Companies which succeed will also be the ones that strengthen and expand their businesses in high growth markets, particularly in emerging countries.

Netherlands-headquartered AkzoNobel, which includes decorative paints, performance coatings and specialty chemicals businesses, reported that its third-quarter net profit in 2011 fell 37% year-on-year. The company blamed the fall on depressed consumer confidence and a hike in raw material prices. Its CEO Hans Wijers said the negative quarterly results were also partly attributed to sluggish demand caused by weaker global economic conditions, in particular the European debt crisis.

In order to turn its fortunes around, AkzoNobel launched a performance improvement programme to deliver additional earnings before interest, tax, depreciation and amortisation (EBITDA) of €500m ($649m) from 2014. The total cost to deliver the programme is estimated to be €425m over three years.

Global analysts Bernstein Research has said AkzoNobel is “slowly turning a corner” on some key issues. “AkzoNobel’s paints and coatings businesses have managed raw materials inflation before and can do it again. Specialty chemicals will continue to be a steady contributor to earnings,” US-based Bernstein said.

German chemicals major BASF is another company that has recently announced new future earnings targets. In November, the company said it aims to grow 2 percentage points above global chemical production growth to increase sales by an average of 6% a year until 2020, assuming that global chemical production will grow more strongly than GDP.

BASF also expects current emerging markets to contribute 45% to sales in 2020, adding that its sales to customers in emerging markets have almost tripled in the past 10 years and accounted for approximately one-third of total sales (excluding oil and gas) in 2010.

However, looking more short term, Bernstein said that BASF’s 2012 earnings are likely to fall dramatically from 2011 estimates because of deteriorating confidence in the chemicals industry and lower volume growth expectations. The analysts said slowing volume growth and a slackening supply/demand balance for many chemicals will reduce the company’s earnings.

BASF's third-quarter net profit slipped by 4.3% year on year to €1.19bn ($1.65bn), as higher costs offset strong gains in sales. Company chairman Kurt Bock said that compared with the first half of 2011, third-quarter growth slowed as uncertainty forced customers to reduce inventories and partially delay orders in expectation of possible falling prices.

“We expect this trend to continue in the fourth quarter. For the full year, we expect worldwide growth in GDP, industrial and chemical production to be just under one percentage point lower than our previous forecast,” added Bock.

French specialty chemicals firm Arkema’s adjusted net profit in the third quarter did inch up by 1.56% year on year to €130m as stronger product prices helped offset spikes in raw material costs and its financial performance was boosted by strong growth in Asia, a region that now accounts for 20% of the group’s sales.

As part of its strategy to improve earnings, Arkema recently announced plans to sell its no-longer-profitable vinyl business to Switzerland-based investment group Klesch so it can focus on its industrial chemicals and performance products segments.

Germany-based Bayer is another of Europe's top chemical producers planning to further expand its activities in Asia. It announced this year it aims to boost its annual sales in the region to around €11bn by 2015.

The firm is planning to further expand its production, distribution network and research activities in Asia and considerably increase its sales in the region through 2015.

It is certain, at least during the first quarter of 2012, that the financial debt crises and inflated raw material costs will hurt the performance of Europe's top chemical firms. However, the amount of pain will depend on how long negative headwinds continue for and how flexible companies are to weather the storm.

It is also important to note that investors will be looking for segments in the chemicals industry that are relatively resilient in case the economic environment deteriorates further, so it is likely that speciality chemical companies will manage to hold up higher costs better than most.

($1 = €0.77)

For more on BASF, AkzoNobel, Arkema, Bayer visit ICIS company intelligence

By: Franco Capaldo
+44 (0)20 8652 3214

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