November 2010 Archives

Nothing lasts forever. You never know what's going to derail a fantastic bull run - at least temporarily.

After unimpeded optimism over several months fueled by the continuing global economic recovery, some serious concerns are coming out of the woodwork.

Expectations for an interest rate hike in China to tame growing inflation threw cold water on world stock markets last Monday. Meanwhile, fears about Ireland's debt crisis and an impending bailout by the EU and the International Monetary Fund (IMF) continued to build.

The crisis in Ireland is also fueling fears about credit problems in other European countries such as Portugal and Spain - a stark reminder that the credit problems in the Eurozone are far from over.

And in the US, the Federal Reserve is facing a growing backlash over its $600bn (€444bn) quantitative easing policy, known as QE2 - both home and abroad. The program is meant to pump money into the economy and lower interest rates further.

But in the early going, the bond market is just not cooperating. US government debt prices are falling, pushing up yields, rather than the other way around.

While the US Federal Reserve is buying Treasuries, investors are selling. It could just be a case of "selling on the news" as prices had already run up substantially in anticipation of the QE2 announcement, but if yields keep rising unchecked for a prolonged period, the Fed will lose credibility.

Critics complain that QE2 could lead to rampant inflation, while other nations also slammed the easy money policy, pointing out that the US is unfairly devaluing the dollar to boost exports. That makes US goods more competitive at the expense of its neighbors.

But thus far, inflation remains contained in the US. The core Consumer Price Index (CPI), which excludes the volatile food and energy components, was unchanged in October for the third month in a row. Price increases in basic materials have not yet translated into higher consumer prices in the US.

In the global chemical markets, producers are riding the wave of rising prices - from the Americas to Europe to Asia.

Voracious Chinese demand and the US QE2 program are boosting petrochemical and polymer prices in Asia, reports Felicia Loo, one of our ICIS pricing editors in Singapore.

"It is a bullish market. The feel is bullish and everything is bullish," said one Chinese polymers trader.

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With the global industrial recovery starting to fire on all cylinders, chemical companies are coming out with increasingly bullish projections for both short and long-term growth.

The comfort level is such that even five-year projections are back on the table - something unimaginable two years ago when the prognosticator's crystal ball clouded over completely.

US-based specialty chemical companies Solutia and Rockwood both came out with robust profit projections for 2011-2015 at their respective investor days in New York.

Solutia expects to post 2011 earnings per share (EPS) of $2.00-2.25 (€1.46-1.65) per share - up from an estimated range of $1.40-1.50 per share in 2010. The guidance came in significantly higher than Wall Street consensus estimates of $1.70 per share for 2011.

And sales in 2011 are expected to rise to $2.1bn-2.2bn from around $1.9bn in 2010, while earnings before interest, tax, depreciation and amortization (EBITDA) are projected to jump to $560-600m from $480m-500m in 2010.

Shares in Solutia jumped by nearly 10% to $20.75 on the better-than-expected guidance.

And in the longer term, CEO Jeffry Quinn said the portfolio has the potential to produce $3.5bn in revenue by 2015, while raising EBITDA to over $1bn.

This translates into 13% annual revenue growth - and that's excluding acquisitions. In addition, the company aims to raise its industry-leading 26% EBITDA margins to about 30% during the period.

The outlook is "very robust... but achievable", said Quinn. Growth is expected to be driven by advanced interlayers made from polyvinyl butyral (PVB) and ethylene vinyl acetate (EVA) for solar and automotive applications, as well as polyethylene terephthalate (PET) performance films for electronics.

And Rockwood is targeting over 20%/year EPS growth from 2011-2015, according to CEO Seifi Ghasemi. The producer of specialty titanium dioxide, lithium compounds, ceramics and surface treatment chemicals also aims to boost its healthy EBITDA margins from almost 20% today to over 22% through the period.

Furthermore, sales growth of around 8% is expected at Rockwood in this period, with organic growth accounting for 5% and bolt-on acquisitions about 3%.

As companies gain confidence in the economic outlook as well as their ability to raise prices, expect more bullish projections in the weeks ahead.

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