INSIGHT: Earnings estimates cut on second-half concerns

09 July 2013 16:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--As prospects for a second-half recovery look less likely, so analysts’ earnings estimates for the chemicals sector move down.

Credit Suisse downgraded its European chemicals earnings estimates for 2013 by an average of 3% it said on 5 July, having reviewed expectations for the second quarter. The bank’s macroeconomic forecasts are now more bearish and below consensus.

“Importantly, we estimate the market assumes an average 8% 2H [second half] organic (ex acquisition, cost savings) earnings growth in 2013. We believe there is downside risk to consensus estimates,” its chemicals sector analyst for Europe said in a note to clients.

Those risks have been apparent for some time but are beginning to catch the eye of financial analysts ahead of the second-quarter earnings season which begins soon.

Demand remains depressed in Europe across important downstream and end-use markets, although there are some indications that demand growth is slowly returning.

For chemicals makers, depressed demand in Asia markets is a bigger headache and will be a feature of the second half.

On Tuesday, the International Monetary Fund (IMF) lowered its global economic outlook on appreciably weaker consumer demand in developing countries and protracted stagnation in the eurozone.

The GDP growth forecast for 2013 was cut by 25 basis points from the IMF’s 16 April outlook, to 3%, and warning given of a longer growth slowdown in emerging markets.

Credit Suisse notes that in the chemicals sector there is limited forward earnings visibility and on order books only some four to six weeks. Spreads between raw material costs and prices are narrowing.

In Europe, the latter trend may have been accentuated by the flooding on the Rhine in June which appears to have affected sentiment and helped push prices higher.

The steep decline in European petrochemical spot prices over the past few weeks is possibly indicating that a downturn is imminent. Petrochemical price volatility for the past three years appears to have been related to the buying patterns of customers in a weak demand and tight credit environment.

At the macroeconomic level, Europe is still not growing and unemployment and austerity hang heavily on industrial and other markets.

Eurozone manufacturing is showing some signs of stabilising, some commentators believe, and the GDP data show that the contraction of the European economies has slowed. The European Central Bank last week held its key interest rate at 0.5%.

The outlook, nevertheless, is hardly bright. The Organisation for Economic Cooperation and Development (OECD) is suggesting that eurozone full-year GDP in 2013 will contract by 0.6% before growing by just 1.1% in 2014.

On release of its eurozone purchasing managers’ index for June, on 4 July, research firm Markit suggested that eurozone manufacturing was showing signs of stabilising.

“Both output and new orders barely fell during June, and on this trajectory a return to growth for the sector is on the cards for the third quarter,” said the company’s chief economist Chris Williamson.

General petrochemical and chemical price weakness is linked to weak underlying demand with raw material cost-led increases difficult to achieve.

Analysts have suggested that currently weak petrochemical spot prices in Europe are indicating a difficult second half.

And of great concern to chemical producers has to be the impact of China’s credit squeeze on already more difficult markets. They have felt the impact of China’s slower economic growth for some time.

The recent decline in prices in Europe may mean that the traditional summer lull, when chemicals demand and production ramps down for a holiday period, has come early.

And something similar may be happening in China but with more significant consequences.

Lower spot petrochemical prices possibly suggest that the traditional peak manufacturing season will be weaker than expected this year. If that is the case, chemicals makers worldwide will suffer in the second half.

Not surprisingly perhaps, Credit Suisse prefers the chemicals stocks in its portfolio that are about more than simply end-market demand.

It certainly cannot see a ‘hockey-stick’ recovery in end-use markets such as autos and believes impending overcapacity in some chemicals will hit European chemical producers hard, risking pricing power and returns.

Read Paul Hodges’ Chemicals and the Economy blog
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Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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