INSIGHT: DSM struggles with weak nylon 6 chain, sees no H2 improvement

07 August 2012 17:49  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The change in fortunes in petrochemicals between the first half of 2011 and the first half of this year is pulled into sharp focus in the DSM second-quarter financial results, published on Tuesday.

The DSM portfolio has shifted markedly in recent years towards nutrition and the life sciences: The Netherlands based company is of the largest producers of vitamins in the world. It also has a strong performance materials business.

But DSM’s polymer intermediates segment was significantly exposed in the April to June quarter to lower product prices and reduced volumes. Earnings were squeezed hard by the rising benzene price.

The turndown in polymer intermediates and to a lesser extent in the company’s engineering polymers businesses were to blame for the 90% year on year fall in net profits for the quarter. The life sciences businesses accounted for around 70% of second-quarter earnings before interest, tax, depreciation and amortization (EBITDA).

DSM is an important producer of caprolactam and acrylonitrile. Its Polymer Intermediates segment sales dropped 8% year on year in the second quarter due to 11% lower prices and 3% lower volumes. As a European company, the price fall was mitigated by a positive 6% currency effect.

But in the second quarter, DSM also undertook the largest turnaround project on caprolactam in the Netherlands in its history. That added to the company’s woes.

“Sales prices declined significantly during the quarter due to uncertain macro-economic conditions causing weakening customer demand and destocking and due to some smaller new entrants,” DSM said of its Polymer Intermediates businesses.

Second-quarter segment EBITDA was in the company’s own words; “significantly below the record levels of 2011.”

It added: “This was due to weak margins arising from increasing benzene prices combined with falling caprolactam prices. At the end of the quarter, margins were significantly below the levels at the beginning of the quarter. Acrylonitrile margins declined too.”

Polymer Intermediates EBITDA was down a significant 68% , or €63m ($78m). The drop was sufficient to cut the EBITDA margin for the segment to 7.7% in the quarter from 22% in the second quarter of 2011.

The caprolactam, and to a lesser extent, acrylonitrile story has a familiar ring to it. Protecting margins in a fluctuating feedstock cost environment is never easy but particularly difficult under current conditions. Caprolactam was squeezed through the second quarter by the benzene price and, particularly, by weak customer demand.

Prices in May and June sank because of weak demand and a lack of buying interest in the nylon 6 sector, where customers were making purchases on a just-in-time basis and reducing inventories. End-use fibre and automotive sectors were weak.

Now producers are concerned they will not be able to pass on higher benzene costs in their own product prices because of the still weak end-use market conditions and the fact that August traditionally is a weak month.

DSM said it did not expect any significant improvement in business conditions for caprolactam for the remainder of 2012. The company also has scheduled plant turnarounds in the US and China.

The business is especially sensitive to GDP growth in China and to recent capacity expansions. Feedstock cost, in other words the cost of benzene, is all important.

Caprolactam, and to a somewhat lesser extent, acrylonitrile, were not the only businesses to be affected largely by macroeconomic uncertainty in the second quarter.

DSM’s Performance Materials segment EBITDA was also lower but by no means to the same extent. Segment sales were up 1%, the company said. Segment EBITDA was down 6% due fully to lower margins in the nylon 6 value chain which offset performance elsewhere.

Volatile and uncertain market conditions are expected to persist, DSM said, and trading conditions are not expected to improve in the second half compared with the first half of 2012.

DSM’s restructuring programmes in DSM Resins, announced in 2011, are said to be contributing to the bottom line. But the company on Tuesday outlined another major restructuring programme which will have an impact across most of the group.

The programme will lead to a reduction in the number of employees globally of 1,000 as business processes are streamlined and an even greater focus is put on sales growth and pricing.

“The global outlook for the second half of the year is more uncertain due in part to Europe’s inability to find an effective and sustainable solution to the financial challenges facing the eurozone,” DSM’s CEO Feke Sijbesma said.

“Because of the increased economic uncertainty, we are announcing today a Profit Improvement Program that includes structural cost reduction and other initiatives that will generate €150m EBITDA benefits by 2014.”

($1 = €0.81)

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By: Nigel Davis
+44 20 8652 3214

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