INSIGHT: Hoping for a rebound but expecting re-stocking

03 February 2012 16:39  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--'Difficult but improving' is the positive message chemical industry players would like us to believe.

Upstream, and down as far as the first line polymers, at least the phrase appears to describe the current market although this does not suggest that margins can improve markedly from the end of 2011.

The first half could be relatively poor before a pick up in activity works its way through into financial results later in the year.

Dow Chemical surprised a little on the downside on Thursday when it posted fourth-quarter and full-year 2011 figures. Analysts currently feel that more sector companies will report worse-than-expected results for the last three months of 2011.

Macroeconomic uncertainty and customer de-stocking dominated the picture from mid-way through the fourth quarter. And companies like Dow were forced to lower operating rates in order to match supply to demand and maintain margins.

Dow said its operating rate was 9 points lower at 72% in the quarter compared with the year earlier period. Earnings before interest, tax depreciation and amortisation (EBITDA) for the diversified US-headquartered chemicals and materials maker were down by 30% in plastics, 23% in materials and 16% in electronics. The underlying net result was 46% lower year on year with equity earnings less than in the fourth quarter of 2010.

Dow is looking forward to demand growth this year, however, driven largely by inventory re-stocking. Few of the large companies can expect more in such an uncertain macroeconomic environment with growth in Europe, particularly, severely curtailed.

Dow CEO Andrew Liveris talked of “considerable weakness” in western Europe in the 2011 fourth quarter. That was offset by still strong growth in China and wider Asia.

“We do not anticipate material improvements in market conditions for the first quarter of the year, but do project economic recovery will gain momentum as we move through the second quarter and the remainder of the year,” Liveris said.

“Regardless, we will continue to intervene to ensure we deliver against our short- and long-term targets."

That means that the firm will stick to its cost control and price discipline targets. Most companies in early 2012 would be expected to act similarly.

There is no evidence of a strong rebound in petrochemical margins so far this year, analyst Jeremy Redenius at Bernstein Research said in a client note this week. Petrochemical margins fell sharply in the fourth quarter on de-stocking and slower demand growth.

Petrochemical producers are keen to push margins higher as early in the year as they can and have had some success in lifting prices to cover still high oil-related raw material costs. But real demand growth and higher volumes have largely proved to be elusive.

Bernstein expects petrochemical margins in western Europe to improve gradually through the first half of the year but says the first two quarters are likely to be “bumpy”.

In Europe, there is encouragement to be had from the latest German IFO Chemical Industry Expectations survey. A tick up for expectations in January supports possible margin expansion in the second half but orders are still too low and inventories too high.

BASF and other firms such as Bayer MaterialScience are likely to have benefited from improved margins for what Bernstein calls “niche commodities” in the fourth quarter. But they may not do as well in the first quarter of 2012 because of rising upstream petrochemical prices.

Margins were sequentially 14% higher for methyl di-p phenylene isocyanate (MDI) in western Europe in the fourth quarter of 2011 and reached re-investment levels for the first time since the start of 2009, the analysts note. MDI margins declined in Asia but were still 54% higher than in the fourth quarter of 2010.

Expandable polystyrene (EPS) margins in the US were 25% higher quarter on quarter but lower in Asia and western Europe. Margins in the caprolactam/nylon 6 chain were up 14% in the US, down slightly in western Europe but down sharply in Asia. It has proved difficult to lift margins for other niche commodities such as polycarbonate (PC) and toluene diisocyanate (TDI).

Bernstein expects the BASF plastics division and Bayer MaterialScience to post margin declines in the 2011 fourth quarter and for the first quarter of 2012 to remain weak.

As Dow illustrated on Thursday, product mix, specialisation and geographic spread were buffers which helped protect chemical businesses from the worst at the end of last year.

They will enable the few to make limited gains in the first half of 2012.

By: Nigel Davis
+44 20 8652 3214

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