US DowDuPont expects de-stocking to persist into second quarter

HOUSTON (ICIS)–DowDuPont expects the de-stocking to continue through the first quarter and into the second, continuing a trend that arose at the end of 2018, the US-based chemical producer said on Thursday.

The fourth-quarter de-stocking went beyond what DowDuPont normally sees at the end of the year, said Ed Breen, CEO. He made his comments during an earnings conference call.

Most of the softness that DowDuPont saw in the fourth quarter came from China, he said. Europe also contributed, while the rest of the world mostly held steady.

By end-market, that softness was pronounced in automobiles and in consumer electronics, mainly for smart phones, Breen said. The US residential market also showed some weakness.

He expects the de-stocking should correct itself in the next few months, with markets returning to normal by the second half of the year.

Not all of DowDuPont’s end-markets saw weakness during the fourth quarter.

The following summarises the comments that company executives made about demand during the fourth quarter.

– Demand rose in most regions for packaging and specialty plastics. The largest increases in demand came from industrial, consumer, flexible food and specialty packaging.

– Volumes rose for elastomer and wire-and-cable applications.

– Falling oil prices hurt demand for microbial-control products, which are sold by the Nutrition and Health business of the Specialty Products division.

– Weakness in US housing markets hurt sales for Sorona, a polyester made of renewable propanediol (PDO) and purified terephthalic acid (PTA). Sorona is used to make carpet fibre.

MATERIAL SCIENCE
For Materials Science, the challenges that the division experienced in the fourth quarter were caused mostly by the sharp drop in oil prices, which compressed margins, said Jim Fitterling, chief operating officer of the Materials Science division of DowDuPont.

Unlike much of the world, the US relies predominantly on gas-based ethane as a feedstock to produce ethylene. Much of the world relies on oil-based naphtha.

As a result, low oil prices squeeze US profit margins. High oil prices expand them.

The negative sentiment that hung over the fourth quarter also pressured the business, he said.

Still,  demand rose for packaging, which is a major end market for polyethylene (PE).

“From a demand standpoint, I don’t see a demand problem,” Fitterling said.

Economic forecasts bear this out.

For Materials Science, the business grows at a 1.5x multiple of GDP, Fitterling said. Many economists expects global GDP should continue expanding this year, so the fortunes of Materials Science should grow as well.

Business is turning a corner, and Fitterling expects the conditions should continue improving after Lunar New Year.

Materials Science should also benefit from the slowdown in new startups of PE plants, he said. Many of projects announced at the beginning of this decade have already started up, so fewer new plants should begin operations in 2019.

As such, PE operating rates should increase by 200-300 basis points, Fitterling said.

SPECIALTY PRODUCTS AND OTHER BUSINESS
Regarding other DowDuPont businesses, photovoltaics continue to be in a tough space, said Marc Doyle, chief operating officer for the Specialty Products division. Volumes are coming back, but the company is still facing some pricing pressure.

“We are expecting that to improve through 2019,” he said.

Solar panels are an important end market for such products as ethylene vinyl acetate (EVA) and polyvinyl butyral (PVB).

Regarding crude prices, the weakness that DowDuPont saw for its microbial-control products could indicate that other chemicals used in the oil industry saw a decline in demand during the fourth quarter.

Surfactants are used in hydraulic fracturing. Epoxy resins and phenolic resins are used to make some types of proppants, so called because they prop up the cracks created by fracking. The oil industry also uses hydrochloric acid (HCl).

LOOKING AHEAD
Looking past the first quarter, Doyle expects to continue to see strength in most of the end markets served by Specialty Products. He specified semiconductors, aerospace, health and nutrition, industrial and infrastructure.

Doyle also expects consumer electronics to recover following the Q4 weakness caused mostly by smart phones, he said.

Doyle expects demand to recover among some of the end-markets that suffered from de-stocking, although he did not specify which ones.

DowDuPont’s outlook follows that of other chemical companies, which also noted de-stocking during the fourth quarter and expect conditions to improve after Lunar New Year.

Focus article by Al Greenwood