Commentary: euro storm hits chemicals industry

13 August 2012 11:07  [Source: ICB]

Rex Features Caption: BoE's King linked UK's decline to the eurozone crisis

The flood of bad news from Europe is cutting into business confidence, and recent second quarter financial results for chemical companies exposed to the region were hit

As eurozone leaders continue in their failure to act decisively, and the UK and France both further downgrade growth forecasts, more evidence is emerging of the drag on chemical sector financial results, especially those with large businesses in this region.

The UK's Bank of England (BoE) last week lowered GDP growth prospects from 0.8% to zero for 2012. Meanwhile, France forecast a contraction of 0.1% for the third quarter, after posting the same rate of decline in the second quarter. The BoE's governor, Mervyn King, pointed to the lingering eurozone crisis, and said it was up to leaders such as European Central Bank president Mario Draghi to act to resolve the problem.

That now seems unlikely after he appeared to backtrack over recent promises to "do whatever it takes" to save the euro. He outlined only a vague plan to buy the bonds of struggling euro-bloc countries.

Meanwhile Greece, which has suffered five years of recession, is fast running out of cash. It is still €4bn ($4.9bn) short of its austerity target of €11.5bn in savings needed to qualify for the next €173bn bailout. And just when you thought the news couldn't get any worse, we also learned last week that Italy's economy shrank by 0.7% in the second quarter, totaling a contraction of 2.5% over the past 12 months. And over in Germany, factory orders shrank by 1.7% in June.

This continual storm of bad macroeconomic news during 2012 is now affecting financial results, especially for companies with heavy exposure to the European economy. The knock-on effect on growth in China, a major exporter to Europe, is also being felt.

Dutch group DSM's polymer intermediates segment was significantly exposed in the second quarter to lower product prices and reduced volumes. Earnings were squeezed hard by the rising benzene price.

A turndown in polymer intermediates and to a lesser extent its engineering polymers businesses were to blame for a 90% year-on-year fall in net profits for the quarter. DSM is an important producer of caprolactam and acrylonitrile. In its polymer intermediates segment sales dropped by 8% year on year in the second quarter due to 11% lower prices and 3% lower volumes.

Germany's Lanxess's European business was also hit hard in the second quarter. Sales fell by 2% to €650m with business declining particularly in Italy and Spain. In Germany underlying sales fell by 5.4%.

By: Will Beacham
+44 20 8652 3214

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