Weak margins hit earnings

By Malini Hariharan

It is the results season and numbers posted so far confirm that the last quarter has been rough with depressed demand, weak product prices and firm feedstock costs affecting earnings.

Siam Cement Group’s EBITDA for the chemicals division dropped 25% in Q4 from the previous quarter, while sales revenue declined by 5%. This was despite a 9% jump in polyolefin sales volume (mainly from exports) during the same period. Profit for Q4 was down 79% and down 51% for the full year , partly because of reduced margins, said the company in a presentation to analysts.

Indian major Reliance Industries posted a 11% drop in EBIT in Oct-Dec 2011, compared with the previous quarter. Sales revenues were down 6%.

In a presentation to analysts Reliance highlighted the challenging environment for the petchem industry last year: stagnation in Chinese imports, rising exports from the Middle East (exports have doubled in last 5 years to 15.5m tonnes and increased by 2.2m tonnes in 2011), high oil and naphtha prices resulting in a cost push during a period of demand slowdown.

The Indian market was also weak with polypropylene (PP) and polyethylene (PE) demand declining 6-7% during October-December, from the previous quarter, said the company. PVC was the only exception posting a 21% jump in demand during this period. For the 9 months ended 31 December 2011, Indian polymer demand was up only 4%, a dramatic change from the robust markets seen in 2010.

It was a similar story in the polyester market which was affected by cautious buying and reduced demand as a result of a power shortage in parts of the county. Overall polyester demand was down 2% during April-December 2011.

Middle East companies were also not spared. SABIC attributed lower prices for the worse-than-expected decline in its fourth-quarter earnings, which were down 10% year on year and 36% lower than in the third quarter.

SABIC said that its volumes had been higher during the reporting period but that it had been hit by lower selling prices. A loss at the Saudi Kayan joint venture also clearly dented the net result.

The company’s results surprised financial analysts with a fourth-quarter net income of Saudi riyals (SR) 5.2bn ($1.4bn), 44% lower than the consensus estimate of SR7.4bn.

Korean companies have yet to announce their results but analysts are forecasting weak numbers for Q4 2011.

In a recent report on Korean companies, analysts at Woori Investment & Securities said they expected sales of petrochemical companies under their coverage to decline 5.9% quarter on quarter while operating profit was likely to be down 36.5%.

Among the Korean companies, they expected LG Chem to post relatively solid earnings compared to its peers thanks to solid earnings at the company’s information and electronic materials division. Honam Petrochemical was expected to post sluggish earnings due to operating losses at overseas subsidiary KP Chem. Kumho Petrochemical was likely to miss consensus due to poor BPA margins and one-off losses and Hanwha Chem was also expected to fall short of market expectations on continued operating losses in its solar business.

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