INSIGHT: Lower commodity chemical margins hang over Q2 results

17 July 2012 17:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The upcoming earnings season will be noteworthy for a few reasons. Second-quarter financial results will reflect the impact of slowed growth in major markets, this time including emerging economies.

Investors and others will be scouring reports for pockets of volume and price resilience, and noting companies’ closely worded outlooks. Senior executives’ comments will set the tone for sector and sub-sector analyses for the second half.

“Our latest chemicals pricing update shows gross margin expansion in the US and resiliency in Europe despite weak volumes,” the London office of Bernstein Research said on Tuesday. “This resiliency is the key reason we expect few big earnings disappointments across the sector at Q2:12 [second quarter 2012] results.”

US players benefited from lower costs in June, Bernstein says, and gross margins increased sequentially and year on year despite lower prices. Costs came down for Europe’s chemical makers in May and June.

It depends, of course, where you sit in the value chain and, subsequently, the dynamics of cost and price movements. European specialty chemical makers, for instance are likely to have performed rather well in the second quarter. Likewise, possibly, specialty chemical makers in the US.

Upstream, the picture is different. Commodity chemical prices were down 2% year on year in the EU and flat year on year in the US, probably due to weak volume growth, Bernstein says. It adds that gross margins were roughly stable.

Looking at ICIS’s own data, the ICIS petrochemical index (IPEX), which reflects the price of 12 petrochemicals, was down 8.8% year on year in northwest Europe in the second quarter but up 2.4% sequentially. The improvement compared with the first quarter of 2012 would have been partly due to the weakened euro against the US dollar because the index is based on dollar denominated prices.

The much weaker year on year picture was reflected in the US – with the US IPEX down 8.2% – and in Northeast Asia, with the regional IPEX down 12.1%. The regional index movements from the first quarter to the second quarter were flat in the US but down 9.1% in Asia.

The lower prices reflected in these indexes will have benefited certain downstream chemical producers and specialty chemical makers.

Bernstein says that the specialty chemical prices it charts were roughly flat month to month in May and June and 2% higher month to month in all regions.

“This price stability enabled major gross margin expansion in the US and slight expansion in Europe,” it adds.

Europe naphtha-based cracker margins were 33.8% higher on average in the second quarter compared with the same period in 2011 and more than double those that it was possible to achieve in the first quarter of 2012. These contract price margins are calculated from the margins available for ethyene and co-products from the cracker.

In the US, ethane cracker margins in the second quarter were up by 20.6% year on year but down 6.5% from the first quarter of 2012, even though year-on-year ethane costs almost halved. The demand slowdown worked its way through the ethylene chain in the quarter and US product prices tracked down with the price of oil.

Petrochemical prices generally have fallen significantly with the price of oil, with benzene probably the exception, and these lower costs are likely to filter through specialties markets later in the year.

A rebound in commodity prices, including prices for the major petrochemicals seems far off but could be prompted by the latest round of quantitative easing.

“The unleashing of cheap money in the eurozone and China, and a new £50bn ($77bn, €63bn) round of quantitative easing (QE2) in the UK are fighting weak economies in Europe, a continuing slowdown in China and a US economy that could be tipping towards another recession,” ICB editor Joseph Chang noted this week.

“Most major governments are loosening monetary policy to counter economic slowdowns. Now it’s time for the US central bank to act. Absent any move, there is no reason to expect that the US economy will not follow its leading economic indicators all the way down.”

Deep concern about the direction of the US economy, the continuing eurozone crisis, and China’s growth slowdown all weigh heavily on chemical markets.

As Chang says: “There is a confluence of opposing forces at work in the global macroeconomic picture, making this time particularly uncertain for buyers and sellers of chemicals.

“Wall Street is expecting an ugly second quarter earnings season for the chemical group, with many analysts having already slashed estimates and others trimming numbers last week. Guidance on second half performance is likely to be tepid at best.”

($1 = €0.81; £1 = €0.79)

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog


By: Nigel Davis
+44 20 8652 3214



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