29 November 2012 18:47 [Source: ICB]
Wall Street expects a profit improvement for most US-based chemical companies next year. But the US fiscal cliff and the continuing eurozone crisis are clouding the outlook
The US fiscal cliff continues to make progress uncertain
For most US-based chemical companies, Wall Street analysts expect double-digit earnings gains in 2013. Of the companies in this table, analysts only expect profit declines from Huntsman and Tronox - both because of the expectation of continuing weakness in the titanium dioxide market.
While an overall improvement in chemical earnings is expected in 2013, there are more key variables than usual clouding the outlook.
Number one on this list is the US fiscal cliff. Automatic government spending cuts and tax hikes taking $600bn-$800bn (€464bn-€619bn) out of the hands of consumers and businesses will kick in on 1 Januray 2013 if a resolution is not reached by the president and Congress. This would plunge the country into recession.
Companies will be loathe to invest capital in new growth projects until there is clarity on this. While chemical companies are still planning capital expenditures for 2013, they also should be putting together contingency plans in case the US falls off the cliff.
Europe has moved to the number two slot for now in terms of key concerns, but the recession there could spread to the more prosperous northern countries such as Germany. While great progress has been made to mitigate the effects of the debt crisis, the region is not out of the woods it is likely to be a while until it is. So far there is not a sniff of growth in the economic winds.
However, China is emerging as a potential bright spot in 2013. The all-important HSBC Flash China Manufacturing Purchasing Managers Index (PMI) for November 2012 came in at 50.4, indicating expansion in the manufacturing economy for the first time since October 2011.
This could be a major inflection point for China's economy. With a new govenrment leadership team in place, many are optimistic that higher economic growth rates will resume.
Also on the positive side of the ledger, the US housing recovery is kicking into another gear. October 2012 housing starts were at their highest level since July 2008. Yet momentum could come to a halt if mortgage tax benefits are capped in a deal to prevent the country falling off the fiscal cliff.
"Ethylene chain profitability will remain under pressure through year-end as downstream demand is hit by seasonally softer demand and post-electoral economic malaise," said Don Carson, senior analyst with investment bank Susquehanna International Group.
"Polyethylene [PE] prices are set to decline by a cumulative $0.05/lb in November/December as buyers step away from the market following aggressive pre-buying over the summer months," he said. "However, despite the demand slowdown, integrated ethylene/PE margins will remain near historic peak levels as ethane feedstock prices hit two-year lows on growing supplies and slowing demand."
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