INSIGHT: US producers gain on lower costs in uncertain environment

29 January 2014 16:54  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Last year was difficult enough for chemical producers and certainly not a time to reap a particularly fruitful harvest. Volume growth was not great and constrained by the slow recovery in the US, a particularly weak Europe and below par growth in Asia.

Prices were under pressure throughout the year given the generally weak demand picture although buoyed by supply constraints and high liquid feedstock costs.

Against that backdrop chemical company performance in the fourth quarter is likely to have been driven more by self-help than by market strength and growth.

The pressures on companies were widespread although the seasonal slowdown towards the year end was possibly not as marked as it is usually. This was possibly due to inventory building by buyers in preparation for the Lunar new year break at the end of January.

For Dow Chemical, which reported its fourth quarter and full year 2013 financial results on Wednesday, it appears as if the drive deeper into end-use markets plus accelerated cost cutting helped make the most of a tough few months. Over the course of the year, it was the low cost ethylene position in the US too that helped raise profitability.

The fourth-quarter results were surprisingly good with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.1bn, up 31% on the year before period and up from adjusted EBITDA of $1.8bn reported for the third quarter of 2013.

Dow said gains were made in each of its operating segments with the adjusted EBITDA margin in the quarter up by more than 300 basis points year on year led by the performance plastics and performance materials segments and by coatings and infrastructure solutions.

Sales volumes were up 3% on an adjusted basis and up 4% overall.

Dow said it had exceeded its $500m cost cutting target for the year as a whole.

The performance plastics businesses pushed sales up 8%, excluding divestments, with double-digit gains in Latin America, North America and Asia Pacific.

The packaging and specialty plastics businesses did well in all regions except Europe where results were affected by the closure of a high density polyethylene (HDPE) plant in Tessenderlo, Belgium at the end of 2012.

Elastomers sales hit a record and were up 13% in the quarter year on year.

Adjusted EBITDA for the segment of $1.2bn was up 40% on the same basis on higher prices.

Performance materials adjusted EBITDA was up 58% at $421m on flat sales volumes and prices up just 1%.

“We exceeded our goals in 2013 despite the challenging market conditions that existed throughout the year,” said Dow CEO Andre Liveris in a statement.

“While we are seeing positive trends in major economies as we enter 2014, global growth remains tentative, continuing to drive business uncertainty,” he added.

That uncertainty is widespread and certainly not segment specific.

DuPont on Tuesday confined itself to saying that its outlook reflected an “expectation” for continuing improvement in industrial production in 2014. The company’s earnings growth in the fourth quarter was driven by seeds, electronics, its safety and protection products, and by nutrition and health.

PPG CEO Charles Bunch said last week that growth was likely “to remain broadest” in the US. Emerging market growth for the coatings and chemicals maker was uneven and Europe appeared to be improving but was still fragile in 2014.

The broad upturn in the US was noted by producers as diverse as chlorine maker Olin and polyethylene producer Philips 66 in their filings for the quarter.

Stronger energy, metals, chemicals and manufacturing markets helped push gas sales for US industrial gases producer Praxair higher in the fourth quarter.

Dow’s performance in the quarter rounded off a year in which the company generated adjusted EBITDA of $8.4bn and an adjusted EBITDA margin nearly 150 points greater.

“The largest gain was achieved by Performance Plastics, which expanded margins nearly 700 basis points as the company extracted further value from both its technology differentiation advantages in key downstream markets such as packaging, as well as its feedstock integration advantage,” it said.

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By: Nigel Davis
+44 20 8652 3214



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