INSIGHT: Sensing demand improvement in Q2

27 April 2012 16:41  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The message from Dow Chemical this week, as it reported on a difficult but consensus-beating first quarter, was that many of its businesses had gained momentum in the first few months of 2012.

BASF on 27 April suggested something similar, saying that demand for chemicals and plastics was picking up following the slow start to the year and that this upturn had continued into April.

The German major said that its appetite, and the opportunity, for raising product prices had not lessened.

All producers suffered in the fourth quarter as demand slumped along many value chains against the weak and uncertain global economic environment.

January was difficult and while there was some improvement in demand in Asia following the Lunar New Year, the comeback was not significant.

February was better than January, however, and March better still.

Performance depends on product portfolios and end-use markets, but most firms are circumspect about the second quarter, reserving any real enthusiasm for the second half.

BASF’s outlook, for instance, is unchanged since February – it is for weaker comparisons in the first half but better-looking results in the second.

Dow said the pace of the global recovery continues to be consistent with its previous outlook. CEO Andrew Liveris said signs of improvement in construction, electronics and transportation markets were encouraging.

BASF has seen demand improve from the automobile industry, particularly in North America, and in Asia for its plastics and coatings.

For other products, demand in North America was stronger than in either Asia or Europe.

The large chemical companies are among the first to feel the impact of the shifting pattern of economic growth in China.

“As Chinas economy moderates, it will remain attractive as it transitions from managing inflation to encouraging domestic growth,” Liveris said.

He told financial analysts that “our sales in the United States, Germany and China all grew double-digits from February to March…excluding the seasonality of our Ag [agriculture] business. Importantly, this momentum is ahead of what we saw last year”. He said China’s growth was “stabilising”.

Europe is a problem for both companies because of its relatively weak demand environment, high costs and market uncertainty, given the plight of the euro.

Passing on high naphtha-based raw material costs was a constant battle through the quarter and passing on those higher costs further downstream will be a feature of the second quarter.

A record high naphtha price in Asia clearly had an impact on BASF’s production activities in the region in the first three months of the year.

Dow said that domestic growth for its products in the US and Germany had been encouraging. Adjusted Europe, Middle East and Africa volume growth was 7% year on year.

Volumes were up by 2% in the US for Dow on the same basis while, “Emerging geographies posted a 10th consecutive quarter of year-over-year volume growth on an adjusted basis, led by gains this quarter in the Middle East, Africa, India, and Eastern Europe”, it said.

The volume increase in Europe for Dow, however, was largely driven by sales of propylene following the divestment of the polypropylene business to Brazil’s Braskem.

In a similar manner, volume sales of petrochemicals in Europe for BASF were buoyed by the sale of styrene to the BASF/INEOS styrenics venture, Styrolution.

Volume sales in its chemicals segment, which comprises the company’s petrochemicals and intermediates, were down by 4% in the quarter and prices down by 1%. These declines, however, were more than offset by an 8% portfolio impact and a 3% gain on currency translations.

BASF’s sales in Germany were up by 13%, and in Europe 12% higher, because of increased prices and volumes. Earnings before interest and tax (EBIT before special items) were 7% higher in Germany and up by 2% in Europe due mainly to a considerably higher contribution from oil and gas.

BASF’s oil and gas sales were up by 44% in the quarter and oil and gas EBIT excluding exceptional items up by 55.5%.

BASF’s sales in North America were down by 4% in US dollars but flat in euro terms. EBIT before special items were down 6% because of lower margins and a scheduled outage of polyurethane intermediates production from Geismar, Louisiana.

BASF benefits from low natural gas prices in North America but not from the low-cost ethane advantage.

Dow Chemical, on the other hand, is playing the shale gas and shale natural gas liquids (NGL) card to the full and is reaping the benefits of low-cost olefins down some of its value chains.

The BASF results added colour to the impact of slower growth in China on chemicals in the first quarter. The company’s sales in the Asia-Pacific region were down by 8% in local currency terms and 3% in euros. Lower plastics volumes and lower sales prices in chemicals contributed to the decline.

BASF’s earnings in the region, however, were 47% lower year-on-year, due to lower margins on basic products, but up on the fourth quarter of 2011.

First-quarter 2012 margins in Asia-Pacific were relatively low in petrochemicals, because of weak demand and the high naphtha prices, BASF CFO Hans-Ulrich Engel told analysts on 27 April. However, petrochemicals demand in Asia-Pacific picked up towards the end of the quarter and into April, he said, adding, “we see that improving.”

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Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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