Profit warnings, earnings highlight China, auto woes

Source: ECN

2019/02/01

Concerns about the automobile industry and the Chinese economy that arose in the third quarter continued in the fourth, as chemical companies that have issued profit warnings for the upcoming earnings season have shown.

Companies raised similar concerns in their third-quarter results and conference calls. As more chemical companies release their earnings, they should reveal whether these trends could continue into 2019.

AUTOMOBILES SLOW DOWN

So far, the fourth-quarter earnings season is starting out like the third quarter, with companies issuing profit warnings. Both Ferro and Trinseo pointed to weakness in the automobile markets. Trinseo also raised concerns about tyre markets.

The company raised the same worries in a profit warning it issued for the third quarter. Trinseo makes styrene butadiene rubber (SBR), acrylonitrile butadiene styrene (ABS) and other styrenics. Ferro makes enamels, pigments, glazes and tile coatings.

Automobile sales are expected to fall this year, and companies are already seeing signs of this.

Paints and coatings producer PPG was among the few chemical producers that had already released their Q4 earnings. It said fourth-quarter automobile production fell significantly in China and Europe. In fact, automobile builds declined by 16% in China.

In the US, builds should fall modestly in 2019, the company said in its earnings conference call. Worldwide, automobile production should fall by the low single digits in the first half of the year before recovering in the second half, PPG said.

Several trends are working against the automobile industry, including slowing global growth, higher interest rates in the US, and years of record-breaking sales exhausting the supply of potential customers.

CHINA HITS RESULTS

Chemical companies also warned about China. Adhesives producer HB Fuller said its Chinese customers took a hit during the company’s fiscal fourth quarter, which ended on 1 December. This was especially true for Chinese customers who buy adhesives for products that they later export.

“Those are the ones that had pretty dramatic downturns,” said Jim Owens, HB Fuller CEO, during an earnings conference call.

Other signs of weakness showed up in adhesives that end up in products sold to higher end consumers.

Paints and coatings producer Sherwin-Williams said tariffs were taking a toll in China. The company’s wood coatings business was down in the high single digits year on year. Trinseo said concerns about China’s economy caused some delayed earnings.

Outside of China, companies also noted some weakness in Europe. Ferro warned about weakness in architectural coatings, which could point to problems in the US housing market. US existing-home sales fell by 6.4% month on month in December, the National Association of Realtors (NAR) said.

RAW MATERIAL BRIGHT SPOT

Companies did point to some bright spots. PPG said the inventory de-stocking that took place among automotive refinish customers has run its course. Trends should improve in the first quarter. Companies noted that the run up in raw material costs has slowed down or even stopped. HB Fuller is actually seeing a glut in raw materials in China.

Federal Reserve Chairman Jerome Powell indicated that the central bank could slow down its campaign to raise interest rates, which would provide some relief to the housing and automobile industries.

Sherwin-Williams said its sales recovered in December after slowing down in October in November. The recovery was pronounced and conspicuous.

The slowdown in the fourth quarter could have been temporary. If that’s the case, the prospects for companies should improve this year and growth should recover. ■