08 May 2012 16:50 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS)--Managing raw material price volatility and the response to the pressure on volumes in Europe and Asia are the key challenges for producers in the second quarter.
Chemical companies have demonstrated remarkable flexibility in their handling of the fourth-quarter slump and the subsequent upturn which began around the end of January this year. A slow patch now will test their ability to hang on to margins.
The breadth and depth of the portfolio will determine how hard the next few months become.
Few companies expect much in the way of growth in the second quarter. Volumes remain under pressure and the success or otherwise of price initiatives will prove to be vitally important.
The speciality chemical and intermediates producers that have reported over the past few days have shown how critical the flow of price increases were in the first quarter.
Raw material price volatility, however, is here to stay and will make the success, or otherwise, of those initiatives even more important.
Prices have risen sequentially, and on a year-on-year basis, but the fear is that volume pressure could be a lot worse in the second quarter because buyers have been buying ahead of further increases.
A lacklustre US economy, slowing growth in China and a worsening eurozone crisis weigh heavily on the sector.
Volume sales for most products were down in the first quarter compared with a year ago but up on the last few months of 2012. As restocking took hold, from February particularly, companies grasped the initiative to push through price increases and regain some of the margin lost to higher raw material costs.
Netherlands-headquartered DSM, for instance, on Tuesday talked of “more normal business conditions” for its Performance Materials (high-strength polymers) businesses in the first quarter compared with the fourth quarter of 2011 but a year-on-year downturn for this part of its portfolio.
“However, the global economic outlook is still uncertain and conditions remain weak in Europe,” it said. Performance Materials profits were down 13% year on year with sales down 5% on a constant currency basis, on weaker volumes but higher prices.
The company’s Polymer Intermediates businesses (caprolactam and acrylonitrile) saw sales drop 9% on a similar basis with volumes 3% lower and prices down 6%. Segment profits were down but DSM said financial performance had improved compared with the historical average.
“Trading conditions in Materials Sciences have normalised compared to Q4 2011 but continue to be volatile and the end market outlook is uncertain owing to weak consumer sentiment in some of DSM's key geographies. In addition, increasing input costs remain a risk,” the company said.
It expects, however, to report higher group-wide earnings before interest, tax, depreciation and amortisation (EBITDA) for 2012 compared with 2011.
US-based companies are in a healthier cost and (domestic) growth position but remain concerned about the pressure on global operations.
“While we experienced lower volumes in the first quarter of 2012 compared to the prior-year period, we were encouraged by improvement in our base epoxy resins and North American forest products resins businesses demonstrating the diversity of our product portfolio and the benefit of previous cost reductions,” Momentive Specilaty Chemicals CEO, Craig Morrison, said.
Momentive Specialty Chemicals on Monday reported first-quarter segment EBITDA down 16% from the corresponding period of 2011, on sales down 4% at $1.24bn.
“We were pleased with our sequential quarterly improvement compared to the fourth quarter of 2011, supporting by seasonal restocking and some improvement in demand for certain products,” Morrison added. “We continue to anticipate a gradually improving demand environment in 2012.”
The much larger, Brussels-based Solvay, which last year merged with French specialities producer Rhodia, on Monday expressed a similar view.
Solvay’s sales for the quarter were up 3% from the year-earlier period on a pro forma basis but the increase was based on 4% higher prices. Volumes were down 3% year on year.
The company talked of the momentum gained in the quarter in its more cyclical operations from the end of 2011, with sequential volume gains in vinyls and polyamide materials of more than 10%. But it said it expected challenging market conditions to persist this year for its most cycle-sensitive businesses.
Solvay beat market estimates for the quarter and its outlook of a sustained recurring EBITDA performance for the year helped push the shares higher on Tuesday.
Chemical producers generally coped better than expected with high and volatile costs in the first quarter. And of concern now has to be the weak macroeconomic environment that has already put pressure on buyers and pushed some prices lower in recent weeks.
International eChem chairman Paul Hodges refers to the pressure on prices and cash flows in a recent post on his Chemicals and the Economy blog which is hosted on icis.com.
“Buyers rushed to buy forward in Q1 to protect their margins against rising oil prices, and so inventories are high all down the value chain. But today, the reverse pattern is in place,” Hodges says. “Buyers are scared to buy, as they fear prices might be lower tomorrow.”
Today’s inventories will take time to work down, he believes, with the approach of the slower summer period.
“In turn, CFOs will become increasingly worried about their high levels of working capital.”
The big danger now, Hodges adds, is to cash flow, particularly for the vast number of small to medium-sized firms that rely on the banking system for loans.
($1 = €0.77)Bookmark Paul Hodges’s Chemicals and the Economy blog
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