FocusCorrected: Chem firms see margins erode as costs bite

19 August 2008 10:50  [Source: ICIS news]

Correction: In the ICIS news story headlined “Chems firms see margins erode as costs bite” dated 19 August 2008, please read in the table for Arkema …profits of €158m, sales of €1,509m, 2008 margin of 10.5%, 2007 margin of 10.1% and a variation of +0.4… instead of … profits of €150m, sales of €1,489m, 2008 margin of 10.1%, 2007 margin of 10.5% and a variation of -0.4… A corrected story follows.

 

By Mark Watts

 

LONDON (ICIS news)--Europe’s major chemical producers were feeling the pinch of high energy and feedstock costs as profit margins slumped in the second quarter.

 

A sample of 11 large European chemicals producers (see table) shows an average operating margin drop of about 1.6 percentage points.

 

Large-scale plastics producers were noticeably hit the hardest, with Bayer MaterialScience, Total’s chemicals segment, Solvay and Borealis all reporting significant decreases in operating levels.

 

Signs of weaker results for upstream producers showed earlier in the quarter as soaring naphtha prices in Europe had brought cracker margins to their lowest levels since 2002.

 

Small, higher fixed cost crackers in Europe were reported as loss-making during the first half, while a number of crackers had cut operating rates since May.

 

“Europe was generally in line with our low second quarter expectations due to disadvantaged naphtha cracking in the region,” said investment bank Citigroup in a note to investors.

 

Bayer MaterialScience, a major producer of polyurethanes and polycarbonate, said high raw materials costs had dented its profits by over €100m ($147m) in the quarter.

 

The group’s second-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) slumped 9% to €372m, while slower growth was expected to couple with higher costs for businesses in the second half.

 

Although most producers achieved prices increases for olefins derivatives, it was rarely enough to offset surging feedstock costs.

 

The petrochemicals segment of French oil giant Total reported a 70% slump in net operating profits for the quarter. The operating margin dropped 2.4 points to 1.4%.

 

Few producers expected an alleviation of the down cycle during the second half of the year as poor operating conditions were coupled with a stagnant economic outlook for the EU.

Research by the EU’s official statistics agency Eurostat shows the eurozone’s gross domestic product (GDP) shrinking for the first time since the currency’s inception. GDP declined by 0.2% in the 15-nation euro area, compared with the first quarter and by 0.1% in the EU27.

Fears of a sharper slowdown are growing given weakness in Germany, France, Italy and the UK.

 

In a research note, Citigroup analysts said: “Following the second-quarter earnings season, we came away thinking that US and European chemical profit margins are likely to continue getting squeezed in the second half, given chemical industry profits tend to be a lagging indicator of the economy.”

 

“We think the current environment could make it difficult for producers to quickly recover all of the lost margins, as demand has been slowing and major capacity additions in the Middle East are just around the corner,” it said.

 

Declining oil prices will benefit margins for upstream producers, but will be rooted in slowing demand, making it even harder for chemicals producers to pass through price increases.

 

Swiss speciality chemicals company Ciba reported a 61% drop in second-quarter operating profits this week as it struggled to offset the higher costs, but had more confidence moving into the second half.

 

“The half-year results were unquestionably disappointing. We experienced intense margin pressure from the escalation of raw material and energy costs, which went up 10% in the second quarter alone, with the heaviest impact in April and May,” said Ciba CEO Brendan Cummins.

 

“However, by mid-June, we were able to offset these higher costs with sales prices increases and we are seeing further significant sales price increases coming through in July,” he said.

 

Second quarter financial results

 

Company	Profits (€)*	Sales (€)	Operating Margin 2008 (%)	Operating Margin 2007 (%)	Margin Change
BASF	3,033	16,305	18.6	18.2	+0.4
Total (chemicals)1	78	5,478	1.4	3.8	-2.4
Akzo Nobel	526	3,870	13.6	14.3	-0.7
Bayer MaterialScience	372	2,622	14.2	15.6	-1.4
DSM	382	2,430	15.7	15.3	+0.4
Solvay2	249	2,357	10.5	11.9	-1.2
Borealis3	52	1,825	2.8	9.5	-6.7
Lanxess	223	1,765	12.6	12.2	+0.4
Ciba4	33.5	1,531	3.5	8.4	-4.9
Arkema	158	1,509	10.5	10.1	+0.4
Rhodia5	187	1,227	15.2	16.0	-0.8

 

*EBITDA (earnings before interest, tax, depreciation and amortisation) unless noted

 

¹adjusted operating income

²REBIT (recurring operating income)

³operating profit

⁴EBIT

⁵recurring EBITDA

 

($1 = €0.68)

ICIS Copyright © Reed Business Information 2009

Author: Mark Watts
+44 20 8652 3214

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