INSIGHT: H2 lift for Europe chemical industry looks a tall order

22 August 2012 17:50  [Source: ICIS news]

By Franco Capaldo

LONDON (ICIS)--Most European chemical companies were probably hoping at the beginning of 2012 that their second-half performance would make up for an anticipated difficult first six months, but that wish now seems a little out of reach.

There was a shred of hope when the year started of a turnaround in the industry’s prospects in the second half of the year, with low stock levels in several end-markets possibly leading to some restocking once economic uncertainty in Europe cleared.

However, a pickup in the economy, particularly in the eurozone, is now difficult to believe, no matter how optimistic you are. In fact – it's more realistic the economy will take a couple of steps back before any strides going forward are made and downstream industrial players are convinced the demand slowdown witnessed in the second quarter will persist.

The majority of the chemical companies in Europe, apart from a small few, have now reported their first-half earnings and it’s fair to say that results have been disappointing.

Many of the big chemical producers which dominate, and act as a bellwether for, the European industry reported a fall in earnings during the second quarter compared with the same period in 2011.

Carolyn Buller, head of global legal practice Squire Sanders’ chemicals industry group, said: “The eurozone crisis is a drag across the globe and it’s especially hard on Europe and that is what you see in the first half results." She added: “At present, it makes doing business in Europe dismal, very difficult”.

In Germany, chemical producer BASF’s second-quarter net profit fell by 15.5% year on year to €1.23bn ($1.53bn), Bayer reported a 33.9% year-on-year fall in its second-quarter 2012 net income to €494m, while LANXESS’ net profit fell by 2.8% to €176m.

In addition, French chemicals firm Arkema swung to a second-quarter net loss of €12m, from a net profit of €184m in the same period last year, following the divestment of its vinyl business, while Switzerland-registered INEOS' second-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) fell 46.5% to €308m year on year.

Austria-based plastics producer Borealis also reported a decline in earnings with second-quarter net income falling 33% year on year to €112m, as its Polyolefins business was impacted by difficult market conditions.

Of course, some companies did reverse this trend, proving the second-quarter profit of 2011 could be improved upon. Belgium-based producer Solvay’s second-quarter adjusted net profit rose by 2% year on year to €258m, buoyed by higher selling prices and favourable currency effects, while Switzerland-based specialty chemicals producer Clariant International's second-quarter net profit rose by 75% year on year to Swiss francs (Swfr) 70m ($73m, €58m).

Clariant's CEO Hariolf Kottmann at the time confirmed the group’s expectations of increasing its profitability in the second half-year compared with the same period in 2011, supported partly by the integration of Germany-based specialty chemicals firm Sud-Chemie, as well as by additional sales from new production capacities in growing segments.

Evonik, which saw net profit surge to €264m in the second quarter of this year, compared with €94m in the same period in 2011 when earnings were impacted by high one-off expenses related with divestments, also remains optimistic about its specialty chemicals business despite difficult trading conditions.

Klaus Engel, chairman of Evonik said at the time of the company releasing its earnings: “Our operating business is still doing well. We are on course in waters that are getting rougher.” However, he did add that it would be better if further deterioration in the economy could be avoided; “… we do not need a further economic downtick,” he said.

On the other hand, however, BASF conceded it does not expect global economic growth to pick up in the second half of the year and believes it unlikely that earnings from its chemical businesses in 2012 will match those of 2011.

LANXESS meanwhile, said it also does not expect to see any further momentum in the second half of the year in view of increasing economic challenges, and continues to predict weak economic development in Europe as a result of the euro debt crisis. It added that raw material and energy costs are expected to remain volatile in the second half of the year.

During an earnings conference call on 26 July, Andrew Liveris, CEO of US-based chemicals major Dow Chemical, suggested that normal economic growth would be unlikely for up to two years.

“We said 12–24 months in our recent outlook,” said Liveris. “What that means is we’re bracing ourselves for it not to be like what I’ve just described. We’re basically saying that this is a world full of uncertainty, capital is a coward and all of us are retreating and that’s not good. If business starts to retreat further, you’ve got a self-fulfilling prophecy in countries such as Germany and the US.”

“When I talk with chemical companies, that [Liveris’ comments] is really consistent with what they are saying – they do not see any immediate relief in sight, so I would not expect a surprise uptake in the second half,” said Buller. "I hope I am wrong about that,” she added.

Overall, CEOs which provided outlooks within their company earnings seemed to have all been singing from the same hymn sheet. The idea of being cautious of the future was bandied about on more than one occasion, seemingly the buzzword for chemical companies in 2012. And if recent data is anything to go on, this cautious approach is understandable. The future does not fill a person with confidence.

Initial estimates from statistics agency Eurostat on 14 August suggest that second-quarter GDP fell by 0.2% in both the EU and the eurozone from the previous three-month period. Among EU member states, the largest declines were seen in Portugal (-1.2%), Cyprus (-0.8%), Italy and the UK (both -0.7%), and Finland (-1.0%).

Data, also from Eurostat, shows that chemicals production in the EU fell in June by an estimated 2.1% month on month, while production in the eurozone during the same month decreased by 1.6% from May. Year on year, chemicals production continued its downward trend. In June, production in the EU fell by 2.4%, while output in the eurozone was down by 1.9%.

This fall in chemical production can be explained to some extend by a slump in end-user demand. Construction output in the 27-member EU, which is one of the chemical industry’s key downstream markets using a wide variety of products, including plastics and adhesives, in June dropped by 1.7% compared with the month before, following large decreases being registered in the UK, Romania and Germany. On a year-on-year basis, output in June decreased by 5.8% in the EU.

Meanwhile, the production of automobiles, another industry which a wide variety of chemical markets depend on demand from, has taken a nose-dive. According to data from the European Automobile Manufacturers’ Association (ACEA), 1,201,578 new passenger cars were registered in the EU in June, down by 2.8% from the same month in 2011, continuing the downward trend which began in October last year.

In its most recent chemicals trends report, trade group Cefic, citing the latest EU Commission business and consumer survey results, reported that confidence in the EU chemicals industry declined 2.9 points in July, based mainly on a significant deterioration in managers' expectations for the months ahead of 5.2 points. The survey also showed that managers’ assessment of their companies' current level of order books fell by 1.5 points.

Buller said that when the first downturn hit in 2008/09, chemical companies reacted quickly with some intelligent cost-cutting to preserve margins and that held the trough to a limited period of time.

“One of the questions you might ask - is there more cost-cutting in Europe given the dismal condition they [chemical companies] face,” she said.

At the same time Finland’s Kemira reported a 1.89% year-on-year fall in its second-quarter net profit to €31.1m on the back of higher fixed costs, it announced it would cut up to 600 jobs as part of a global restructuring programme to improve profitability, lower costs and accelerate growth in emerging markets.

There is a serious possibility other European producers will follow suit with further, more drastic, cost cutting measures.

Buller added that companies are also looking to do more projects, outside Europe, largely in China, to limit their exposure to the eurozone debt crisis.

The facts do not make good reading, especially with no sign of an economic recovery on the horizon. The chemical industry will be keeping its fingers crossed for a miracle. Losing the dream of a better second half is one thing, but a nightmare of further deterioration in the European economy is a much more worrying reality to contend with.

Additional reporting by Nigel Davis

($1 = €0.81, $1 = Swfr 1.20, €1 = Swfr 0.96)

By: Franco Capaldo
+44 (0)20 8652 3214

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