Q2 chem earnings to fall 2% year on year – US analyst

13 July 2012 17:06  [Source: ICIS news]

Q2 chem earnings to fall 2% year on yearHOUSTON (ICIS)--Second-quarter earnings for chemical companies will likely fall 2% year on year because of the recession in Europe and the slowdown in Asia, an analyst with US-based Wells Fargo Securities said on Friday.

Likewise, earnings estimates for the second half of 2012 and 2013 will likely fall, said Laurence Alexander, an analyst with Jefferies.

The two analysts released their earnings previews less than a week before the season kicks off for the chemical industry, marked by the releases of PPG Industries, Sherwin-Williams and Cytec Industries on 19 July.

Overall, lower oil prices and tepid demand marked the second quarter, said Frank Mitsch, managing director for Wells Fargo Securities. The US was the only stable economic region, given the weakness in Europe and the slowdown in China.

Because of the relative strength of the US economy, the dollar strengthened, which would make chemical exports less competitive.

On the other hand, feedstock costs fell because of a glut of ethane, Mitsch said. In fact, LyondellBasell had reportedly bought ethane for 1 cent/lb ($22/tonne, €18/tonne), he said.

The oil-to-gas ratio remains high, giving North American ethylene producers a cost advantage against much of the world.

In fact, North American end markets do have some pockets of strength, such as the industrial and automobile sectors.

Because of that strength, Mitsch expects paints and coatings producer PPG Industries to report some of the biggest year-on-year gains in the industry.

Polyolefins producer Westlake could also report larger earnings because of a wider ethane-to-polyethylene (PE) spread, he said.

FMC should benefit from gains in its key markets, soda ash and agricultural chemicals, Mitsch said.

On the other extreme, titanium dioxide (TiO2) producer Kronos could report the largest decline because price increases for pigments have not kept up with rising production costs, Mitsch said.

Already, TiO2 producer Tronox has warned that second-quarter earnings could fall 20% quarter on quarter, he said.

For acetyls producer Celanese, its earnings could be dragged down by weakness in Asia's acetic-acid market and in the European automobile sector, Mitsch said.

Dow Chemical's earnings are vulnerable to higher costs for inventory and agricultural production as well as the warm winter, Mitsch said. The warm winter pushed sales that would normally take place in the second quarter into the first quarter.

As chemical producers attempt to forecast future earnings, they will likely be more cautious, said Alexander of Jefferies. Their main concerns will revolve around the resilience of US consumers, pressures on the EU budget and the slowdown in emerging economies.

Other concerns include auto production during the second half and the simultaneous tax hikes and spending cuts that could take place in the US at the start of 2013, the so-called fiscal cliff, Alexander said.

Among emerging markets, rising food costs could increase inflation, causing countries to delay stimulus programmes needed for the economy, he said.

On the other hand, lower feedstock costs could more than offset any worries about volumes for the second half of the year, Alexander said.

($1 = €0.82)

By: Al Greenwood
+1 713 525 2645

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