October 2010 Archives

As they say in US NASCAR racing - gentlemen, start your engines!

After a blip down in world stock markets on Tuesday, October 19, sparked by China's quarter-point hike of a key interest rate as well as continuing fears in the US about the consequences of an ongoing investigation into improper foreclosures, bourses were back in the black on Wednesday.

Industrial stocks, including chemicals of course, were pounded on Tuesday but led the rally on Wednesday.

The widespread rally in the chemical sector was bolstered by the announcement by Germany's BASF, the world's largest chemical company, that it expects strong third-quarter earnings and record overall 2010 results.

And looking to the fourth quarter, the company expects the favorable business conditions to continue. For all of 2010, it anticipates sales of €63bn ($88bn) and underlying earnings before interest and tax (EBIT) of over €8bn.

Hassan Ahmed, analyst at US-based investment advisory firm Alembic Global Advisors, found it "particularly noteworthy" that BASF's underlying Q3 earnings EBIT guidance of €2.2bn is ahead of its reported Q2 EBIT of €2.1bn, signaling sequential earnings improvement.

This bodes well for US-based Dow Chemical and Westlake Chemical, as well as Netherlands-based LyondellBasell, said the analyst.

"Current consensus estimates for all three companies are looking for sequential earnings declines in Q3, contrary to BASF's guidance. We are above consensus on all three names for Q3 as well as 2010." said Hassan.

Indeed, Wall Street consensus estimates indicate a significant decline in sequential earnings per share (EPS) for Dow (-24%) and Westlake (-26%). The Street also sees sequential EPS declines for Hunstman (-9%), Celanese (-35%), Methanex (-23%) and Georgia Gulf (-10%).

DuPont's sequential numbers are skewed by seasonality in its ag business, while newly-listed LyondellBasell has no comparable consensus Q3 to Q2 EPS figures available.

But all signs point to an overall strong Q3 for the chemical industry. Analysts will likely boost profit estimates, or companies will surprise to the upside, or both.

Many commodity chemical and polymer markets have remained tight or have tightened further during Q3 - a trend that remains in effect today. During the financial and economic crisis of 2008-2009, companies cut back on capital expenditures and shut down marginal production facilities, leading to some of the tight markets we see today.

And for all US Treasury Secretary Tim Geithner's talk of not devaluing the US dollar, it is not this office that controls monetary policy. That's the domain of the US Federal Reserve, whose chief Ben Bernanke is poised to unleash an estimated $1 trillion of funds into the economy with purchases of debt securities - otherwise known as quantitative easing (QE).

This will hand US chemical producers two gifts - greater pricing power as money creation puts upward pressure on commodity prices, and a weaker US dollar, providing an earnings tailwind for those with significant exports and foreign operations.

While the threat of a potential slowdown in the Chinese economic expansion, another potential US mortgage crisis and European austerity measures are not to be dismissed, the overall balance of forces tilts towards a continuing global economic recovery.

Photo credit: www.treehugger.com

After years of discussions, Japan's chemical industry is finally pushing ahead with major consolidation of its petrochemical facilities to boost competitiveness on the global stage.

Japan's largest chemical company Mitsubishi Chemical Holdings and Asahi Kasei, which will start up a joint venture company to unify their cracker operations at Mizushima on April 1, 2011.

The companies will adjust their capacities downward by 2012 based on an expected 30% decrease in ethylene demand, and eventually concentrate on a single naphtha cracker. Right now, both companies have their own crackers - each with 500,000 tonnes/year of ethylene capacity. These are relatively old crackers, with Mitsubishi's built in 1964 and Asahi Kasei's in 1965.

The cracker consolidation move is in response to "declining domestic demand, expansion of large-scale production facilities in the Middle East and increasing supply capacity in China," according to the companies.

Many of Japan's older crackers simply cannot compete with facilities based on advantaged feedstocks in the Middle East and new, larger plants in China that are at the epicenter of an explosion in demand.

Japan's crackers will increasingly serve their domestic market, as exports face greater competition from Middle East product and China's growing capacity.

Ryota Hamamoto, Japanese chemical industry veteran and now senior executive adviser at consultancy Accenture Japan, predicts that 3-5 less competitive crackers comprising 1.5-2m tonnes of ethylene capacity could be shut down in the next 5-6 years (see page 35).

On October 1, the cracker operations of Mitsui Chemicals and Idemitsu Kosan at Chiba started operating under one joint venture called Chiba Chemical Manufacturing. Mitsui's cracker at the site has 553,000 tonnes/year of ethylene capacity while Idemitsu's cracker has 374,000 tonnes/year of ethylene capacity. This also points to capacity consolidation, as the companies will explore "raw material options, production optimization, and added value components to form an ethylene center with top level of competitiveness in Japan."

These bold and necessary moves are taking place at the same time companies boost their capabilities in specialty chemicals and polymers, and key intermediates.

We are proud to bring you this special issue on Japan's chemical industry in cooperation with our partner The Chemical Daily of Japan, which has unparalleled on-the-ground insight into this fascinating market.

Photo credit: www.watchmojo.com

As central banks around the world open the money spigots, prepare for a major reflation (or inflation) of asset prices. The impact is poised to hit commodities of all kinds - oil, fuel, metals and chemicals.

Last week, the Bank of Japan announced it will pump $60bn into its economy by buying government bonds, corporate debt and other securities. The central bank is aiming to boost the economy and halt the rise of the yen, which is hitting exports.

This is the "quantitative easing" (QE) move governments around the world are talking about. It essentially pumps cash into the system as central banks buy securities.

World bourses jumped on the announcement. Japan's Nikkei average rose 1.5% on Tuesday, October 5 and another 1.8% on Wednesday to reach a two-month high. On Tuesday, the UK's FTSE index rose 1.4%, while in the US, the Dow Jones Industrial Average jumped over 200 points, or 1.8%, to 10,945.

In the US, industrial materials stocks outpaced the broader market. There were strong gains in the chemical sector with Dow Chemical up 3.6%, DuPont 3.0%, Eastman Chemical 2.8%, Celanese 4.3% and Methanex 3.6% and Westlake Chemical 4.0%.

This was no accident. It is the industrial materials companies that stand to gain the most from asset inflation and a potential revival of the staggering economic recovery. These companies have tremendous operating leverage to higher demand. And with that much more money floating around, there is little doubt pricing power will increase.

Wall Street analysts are also ratcheting up profit estimates for chemical companies for the third quarter and beyond on stronger-than-expected performance.

In the August 16 issue, we called for the US Federal Reserve to crank up the printing press to give a boost to the anemic economic recovery. It looks like that could be imminent. Observers are anticipating a program that could entail the purchase of $1 trillion in government and other debt securities.

The Bank of England is also now pointing to QE after suspending purchases in February. It actually has a nifty 10-page pamphlet downloadable on its website called "Quantitative easing explained: putting more money into our economy to boost spending" - complete with a flow chart.

The European Central Bank has spent €63.5bn (86.9bn) to buy up government bonds.

QE is the last resort, or "nuclear option" when all the other levers to trigger economic expansion have been pulled.

And that's what many global economies face. The US, UK and Japan have all cut key interest rates towards zero. While this has offered economic relief and likely has spared further pain through the recession, it has not led to a solid recovery complete with job growth. Unemployment, especially in the US, remains stubbornly high. Last week's jobs report showed the US private sector shed another 39,000 positions.

The expectation that central banks around the world will turn on the money spigots is reflected in the surging prices of gold and crude oil. These commodities will continue to gain value as the global monetary base is devalued through QE.

It is no coincidence that gold has once again hit an all-time high of almost $1,350/ounce.

Photo credit: www.blog.questionpro.com