27 June 2012 22:46 [Source: ICIS news]
By Joseph Chang
NEW YORK (ICIS)--Sentiment is shifting to a more pessimistic outlook for commodity chemical producers.
Wall Street analysts are lowering profit forecasts for 2012 as well as 2013 on a number of companies in the group as the global economic outlook deteriorates and chemical prices fall. Meanwhile, global investment bank Morgan Stanley has declared the end of the commodity supercycle.
“The daily news about falling oil prices is the beginning of a major shift in the global economy: the end of the ‘commodity supercycle’ – the idea that the rise of emerging markets led by China would continue to drive up prices for oil and other commodities, from copper to corn,” said Ruchir Sharma, the head of emerging markets at Morgan Stanley Investment Management, in an article in the Financial Times on 24 June.
The term supercycle came into vogue in the late 2000s in a period of sharply rising commodity prices, and Wall Street analysts covering the chemical sector were quick to adopt it, whether they agreed with the thesis or not.
The global financial and economic crisis of 2008–2009 quickly struck supercycle from the investment lexicon. Yet upon the following V-shaped recovery in commodity chemical prices and profitability, analysts became more optimistic on the long-term outlook.
But as commodity chemical prices have crumbled across the board with the backdrop of a deteriorating global economy, sentiment is shifting once again.
Laurence Alexander, analyst at US-based investment bank Jefferies, slashed his 2013 earnings per share estimates on US-based Dow Chemical from $3.50, to $2.70, and on Netherlands-based LyondellBasell from $5.80, to $5.15. However, the revised estimates still show moderate growth from 2012 levels.
“Absent a sharp bounce in oil prices, ethylene margins should be hard-pressed to grow year-over-year in 2013. Deteriorating demand prospects suggest a more jagged path to the peak of the cycle, and risk [that the] the timing of the peak slips back,” said Alexander in a 22 June research note.
Deutsche Bank analyst David Begleiter took down his 2012 and 2013 earnings per share estimates for 10 chemical companies by an average of 5% on 21 June.
“Chemical demand softened in the second quarter due to macro headwinds in Europe and slowing growth in Asia – notably China,” said the analyst. “Soft demand has been exacerbated by inventory destocking due to the drop in energy and feedstock prices over the past two months as buyers have stepped back from the market in hopes of capturing lower prices in the future.”
Begleiter expects a stronger second half of 2012 versus the first half in terms of earnings, but notes that upside will be limited until macro headwinds subside.
JP Morgan analyst Jeffrey Zekauskas cut his investment rating on Dow from overweight to neutral, taking down his 2012 earnings per share estimate from $2.60 to $2.40, and his 2013 forecast from $3.30 to $3.10.
“Dow Chemical is probably now weighed down by negative operating leverage from low global utilisation rates and some margin pressure from weakness in its specialty product lines, offset by its advantaged raw material positions,” said Zekauskas in a 26 June research note.
Additional contribution from Paul Hodges, chairman of International eChem and author of the ICIS Chemicals & the Economy Blog
($1 = €0.80)
Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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