Commentary: Chemical companies hold on to the hope of a restocking cycle

30 January 2012 00:00  [Source: ICB]

Following significant customer destocking in the fourth quarter, chemical companies look forward to a restocking cycle in 2012. But will underlying demand recover?

It's not going to be a pretty fourth quarter earnings season for the chemical sector. US-based DuPont slightly beat Wall Street profit expectations but saw a 10% year-on-year decline in volumes, which was largely offset by higher pricing. US-based Celanese gave a profit warning for upcoming fourth-quarter results.

The common theme thus far has been inventory destocking on the part of customers. DuPont pointed out that volume declines in all geographic regions were driven by destocking in photovoltaics, polymer and industrial supply chains. Celanese reported that lower end-market demand in Europe led to sharp inventory destocking in its acetyl intermediates segment. Yet both companies believe the lower volume trend is transitory, and that restocking will lead to a recovery. DuPont affirmed its earnings guidance for 2012, projecting 7-12% year-on-year profit growth.

"DuPont argues that leading indicators and downstream order patterns (e.g. coatings) support a restocking cycle," noted Laurence Alexander, analyst at US-based investment bank Jefferies & Co.

"Both volumes and TiO2 pricing hinge on underlying demand remaining intact. We expect DuPont [stock] to be range-bound until restocking is confirmed, most likely in March or April," he added.

Celanese has indicated that business conditions have improved early in the first quarter of 2012. "We are experiencing improved order patterns as the first quarter progresses and expect to deliver earnings in 2012 that are above current consensus estimates for adjusted earnings per share that average $4.70," said CEO David Weidman.

Many companies will hang on to the hope that restocking will start to propel volumes and earnings upward through the year. While this is not unreasonable, growth in underlying demand will be needed to make any recovery sustainable.

By: Joseph Chang
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