Risk to Q4 chemical earnings estimates

Do third quarter earnings really matter? As we move into the thick of the earnings season, all eyes will be on how the fourth quarter is shaping up and how analysts will handicap fourth-quarter 2011 and full-year 2012 projections.

Leading up to results, pre-announcement warnings have been scarce in the chemical group, boding well for overall third quarter numbers in relation to analyst expectations. The impact of the global economic slowdown will be evident, but likely to be more pronounced in the fourth quarter.

For the petrochemical sector, there is particular risk to the fourth quarter outlook. One key question, says Laurence Alexander, analyst at US-based investment bank Jefferies & Company, is: What will be the timing of volumes and margins in the fourth quarter? US ethylene margins have contracted sharply in the past two months, while volumes have been lackluster.

“Anecdotally, volumes in October are weak as downstream buyers wait for derivative pricing to come down,” says the analyst. “Fourth-quarter earnings prospects for polyolefin producers hinge largely on if volumes recover in November, ahead of the winter shutdowns, and if such an uptick in volumes coincides with margin recovery.”

Alexander sees downside risk to Wall Street’s fourth-quarter consensus estimates for US-based Dow Chemical and Netherlands-based LyondellBasell. His earnings-per-share forecasts for Dow and LyondellBasell are $0.37 (versus consensus of $0.50) and $0.77 (versus consensus of $0.92), respectively. His 2012 earnings-per-share estimates on Dow and LyondellBasell for 2012 are also significantly below consensus.

On the flip side, Hassan Ahmed, analyst at US-based investment research firm Alembic Global Advisors, sees positive signs that global chemical volumes are not as weak as many believe. At Dow’s investor day meeting on October 4, the company indicated that it continued to see significant demand growth across almost all end markets in China – “negating the cycle bear arguments in our view,” says Ahmed.

More recently, he points out that strong third-quarter results from Saudi Arabia-based SABIC bode well for commodity chemical sector results in the quarter.

Yet on the outlook, most analysts have taken down 2011 and 2012 earnings-per-share estimates in the past several weeks, with more cuts likely to come following third-quarter earnings season.

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