September 2010 Archives

The third quarter is shaping up to be a strong one for the global chemical industry. Fears of a summer slowdown following a robust Q2 are fading like the hot weather.

Germany's BASF, the world's largest chemical company, announced on September 22 that Q3 profits will come in better than expected, bolstered by strength in Asia.

Earlier on September 16, US-based Eastman Chemical gave a heads up on higher-than-expected Q3 profits as pricing remained solid and volumes did not drop seasonally as much as anticipated.

In the US, Wall Street analysts are mostly ratcheting up Q3 earnings estimates for chemical companies.

BB&T Capital Markets analyst Frank Mitsch on September 29 raised his Q3 earnings per share (EPS) estimate on Huntsman by a nickel to $0.20. He said the company is seeing a 7%-plus growth rate in polyurethanes globally and operating rates have moved from the mid-70% range to around 80%.

Other analysts have boosted profit forecasts for Dow Chemical, Albemarle, and Cytec Industries, while trimming estimates for Ashland and H.B. Fuller.

Look for a further bump-up in Wall Street's Q3 earnings estimates as well as upside surprises. Say goodbye to the summer and the slowdown.

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Transforming a business is no easy feat. First you have to recognize the necessity for change, and then comes the daunting execution, which can take years. And even after a major transformation, it can take time for people to fully appreciate the change and its implications.

Take US-based specialty materials firm Solutia for instance. It is an altogether different animal than the one that entered bankruptcy in 2003. The "former" Solutia featured a commodity nylon business that overshadowed its performance business, accounting for $964m, or 57% of sales, and generating a $50m loss in the first three quarters of 2003 before it filed for bankruptcy.

The company was also saddled with $1.13bn in pension and $428m in environmental and other liabilities - legacy liabilities it assumed when it was spun off from Monsanto in 1997.

In bankruptcy for the next several years, under its new CEO Jeffry Quinn appointed in 2004, it embarked on a strategy to focus on "high-potential businesses" that could deliver returns above the cost of capital.

In 2005, Solutia shut down its acrylic fibers business. The company and partner US-based chemical firm FMC also sold their 50:50 phosphates joint venture Astaris for $255m.
In 2006, Solutia sold its pharmaceutical services business for $74.5m. In 2007, it disposed of its water treatment phosphonates business for $67m.

In 2008, it finally emerged from Chapter 11 bankruptcy protection, shedding much of its legacy liabilities. But it was still known in some circles as "the nylon company" - a moniker that implied flat growth and exposure to volatile market forces.

In June 2009, Solutia shed its large nylon business for $50m, completing its transformation into a producer of advanced interlayers, performance films and technical specialties.

After two acquisitions in 2010 boosting its window films business and adding ethylene vinyl acetate-based solar encapsulants to its portfolio, Solutia sports enviable high-margins and strong growth prospects. Now if only investors would pay attention. Solutia at $15.70 trades at a modest EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortization) multiple of 6.3 times trailing 12-month EBITDA.

We talked to CEO Quinn about the transformation and his growth plan in the September 27 issue of ICIS Chemical Business, which could entail the company adding a fourth business in the future.

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In the August 30 Commentary, we put out a call for chemical companies to refinance their debt now at favorable rates: "Today there is no excuse for a company not to push oput its debt maturities. Interest rates are at record lows, and financing is available - even to those companies without the most stellar credit ratings."

Right on cue, more and more companies are lining up to do just that. On September 13, US-based chemical major Huntsman announced it will offer $350m in 8.625% senior notes due 2021. Some of the proceeds will be used to retire $165m in 7.875% notes due 2014.

Days earlier on September 10, US-based plastics compounder PolyOne announced a $320m offering of 7.375% senior notes due 2020, proceeds of which will be used to retire its 8.875% senior notes due 2012.

And on September 7, US-based chemical major Celanese announced it will offer $400m in senior notes due 2018. Proceeds will be used to pay down debt on its senior credit facility.

There will be plenty more to come if financing markets remain stable, potentially making 2010 a blockbuster year for debt issuance. The fuse on the "debt time bomb" many were worrying about a year ago is getting extended, giving companies more time to address their leverage issues.

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Like a bad penny, or pence, concerns about the health of European banks keep turning up, hitting stock markets worldwide and undermining what little confidence there is in the fragile global economic recovery. However, the issue is not likely to derail the slow upturn.

On Tuesday, the focus was on Irish banks. The government, which has already nationalized Anglo Irish Bank, said the institution will be split into two parts - one of which will contain the loan assets and be sold or partly sold. The other part will be a stand-alone government-regulated deposit bank. The government also extended guarantees on short-term bank liabilities, including corporate deposits, from the end of Setpember, through the end of the year.

Concerns mounted about the cost of Ireland's bank bailouts, which are estimated at over €30bn ($38bn). Ireland government bonds fell, sending yield spreads against the benchmark German bund to record highs.

Also roiling markets was the expectation that global regulators will agree on a plan to increase capital requirements for banks, driving the need for yet more funding. A German bank association released a report saying the country's 10 largest banks may need to raise as much as €105bn in new capital under the new rules.

On top of that, a Wall Street Journal report indicated that European bank stress test results released in July understated exposure to European sovereign debt.

However, on Wednesday, Portugal's sale of over €1bn in sovereign debt went off better than expected despite the 10-year record yield spreads over German bunds. This eased European debt jitters a bit and stock markets quickly recovered.

Despite the continued worries about European debt, overall business activity and chemical demand appear to be relatively healthy.

For any leading indicator of business activity, look no further than chemical distributors. If there's a spike or collapse in demand, these firms will feel it first.

In an interview with US-based chemical distributor Univar's CEO John Zillmer earlier this month, he said that the commpany has been experiencing "a significant improvement in volumes year to date," and that there has been "no indication of a downturn in volumes."

Univar is the leading chemical distributor in the US and Canada, and the number two player in Europe behind Brenntag, which itself posted solid second quarter results in mid-August.

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