INSIGHT: So far, chem earnings highlight drag from Europe, Asia, energy

Al Greenwood

06-Oct-2022

HOUSTON (ICIS)–A surge in profit warnings from chemical companies has cited high energy prices as well as weakness in Europe and Asia as the main reasons why producers cut their guidance for the third quarter and for the full year.

  • Companies that refrained from warnings are bringing up the similar challenges.
  • HB Fuller and RPM International already released earnings and noted weakness in Europe.
  • ICIS Q3 US Gulf Coast contract margins fell for major plastics and chemicals.

SURGE IN PROFIT WARNINGS
So far, at least nine companies in the US and Europe have either lowered their Q3 guidance, their full-year guidance or suspended their guidance, as shown in the following table.

Company Country Product Action
Tronox US TiO2 Cut Q3 guidance
Chemours US TiO2, fluoromaterials Cut ’22 guidance
Olin US epoxies, chlor-alkali Cut Q3 guidance
Huntsman US polyurethanes, epoxies Cut Q3 guidance
Eastman US specialties Cut Q3 guidance
Avient US compounder Cut ’22 guidance
Lenzing Austria fibres Suspended ’22 guidance
AkzoNobel Netherlands paints and coatings Cut Q3 guidance
Synthomer UK elastomers Cut ’22 guidance

Source: ICIS

Dow did not lower its earnings guidance, but it did warn investors in mid-September that Q3 sales and profits would fall below consensus.

LyondellBasell made comments to investors in mid-September, but it did not issue any profit warnings.

US-based adhesives producer HB Fuller already reported its earnings, as its most recent fiscal quarter started a month earlier than most chemical companies. HB Fuller broke from the general trend and raised its guidance for its 2022 fiscal year.

Like HB Fuller, RPM International, a US-based producer of coatings, adhesives and sealants, started its most recent fiscal quarter a month earlier than most chemical producers. RPM announced its earnings on Wednesday and beat its earlier guidance.

In all, 13 companies have commented about their earnings, and high energy prices as well as weakness in Europe and Asia were the most common complaints.

WEAKNESS IN EUROPE AND ASIA
For China, Huntsman and Eastman singled out the country’s Covid lockdowns.

Avient said it has yet to see any recovery in Asia. Dow noted the lack of any meaningful recovery in China.

US-based paints and coatings company Sherwin-Williams warned about an absent Chinese recovery in late July when it released its second-quarter earnings.

The exceptions included HB Fuller, which saw a significant uptick in Asia during the third quarter. CEO Jim Owens said, “I think we had our first double-digit organic growth quarter in a long time.”

RPM also noted strength in the Asia Pacific region from its Construction Products Group.

For Europe, there were no exceptions. High energy costs and the war between Russia and Ukraine were hitting earnings.

“Europe is in a recession,” said Frank Sullivan, CEO of RPM. He made his comments during an earnings conference call. The region was a challenge for all four of RPM’s business segments.

WEAK CONSTRUCTION
Many companies singled out construction. Europe is contending with the fallout from high energy prices and the war in Ukraine. China’s real-estate market is in crisis.

In the US, a combination of rising house prices and mortgage rates have made homes unaffordable to a growing number of consumers.

HB Fuller said its roofing sales suffered from their commercial customers running out of other non-adhesive supplies that they needed to complete their projects.

RPM said concrete shortages and labour strikes lowered its sales in Canada.

Still, RPM did highlight areas of strength in some subsectors of the construction industry.

Unlike HB Fuller, RPM saw strength in roofing systems, and said it helped drive record sales in its Construction Products Group.

RPM’s Performance Coatings Group sells products to industry, and it is benefiting from companies that are expanding production capacity in areas that are closer to their customers and markets – a process called reshoring.

Increased spending on infrastructure projects could benefit RPM for the next couple of years, Sullivan said.

Local governments in the US still have leftover money from federal stimulus packages from the coronavirus pandemic – money that they could spend on infrastructure projects, he said.

In 2021, the US passed a $1tr infrastructure spending bill, which would develop even more projects.

A one-time surge in demand could result from Hurricane Ian, which passed through Florida and the Carolinas.

STRONGER DOLLAR
A relatively small number of companies mentioned a stronger dollar, but unfavourable exchange rates will bite into the earnings of many other US-based chemical producers.

These chemical companies are exposed to unfavourable exchange rates because they sell a large amount of materials overseas.

When the proceeds of those sales are converted into dollars, US-based companies earn less money.

Plus, a stronger dollar makes US-made plastics and chemicals more expensive in foreign markets. This is especially troubling for North American producers of polyethylene (PE). The region needs to export around 45-50% of their production to maintain operating rates near 90%.

HB Fuller said the stronger dollar reduced Q3 net revenue growth by 6.6 percentage points.

RPM said unfavourable exchange rates represented a 3.4% headwind to its fiscal first-quarter sales.

Other challenges cited by companies include persistent logistic challenges, high energy prices and elevated costs for raw materials.

“The world we live in today is still inflationary,” said RPM’s Sullivan.

LOWER MARGINS
ICIS data shows that Q3 margins declined for PE, polypropylene (PP), ethylene and propylene. That could drag down earnings for companies that sell those products.

All of the figures in the following table show ICIS US Gulf Coast contract margins. The ICIS propylene margins take into account benzene and butadiene (BD) extraction.

ICIS USG Contract Margins Y/Y % Change
Ethane-Based PE -38.1
Propane-Based PP -54.1
Ethane-Based Ethylene -49.8
LPG-Based Propylene -29.6

Source: ICIS

DESTOCKING
Given the economic outlook, some companies have noticed signs of destocking. Synthomer, Avient, Eastman and Akzo-Nobel all noted some destocking. HB Fuller mentioned it during its Q3 earnings call, but said it was not a significant trend.

Destocking could accelerate in the fourth quarter, when companies tend to purge inventories for tax purposes.

BRIGHT SPOTS
Some of the previous trends that have dragged down earnings are becoming less intense. AkzoNobel, a Dutch paints and coatings producer, said that supplies of raw materials are approaching normal levels and feedstock costs are starting to soften.

RPM said the availability of raw materials is improving.

LyondellBasell said logistical constraints are starting to ease, making it easier to export material overseas. That trend should continue in the next six months.

The strength in the oil and gas sector is bolstering the pipe market, LyondellBasell said.

Oil production is an important end market for other polymers and chemicals, such as epoxy and phenolic resins, ethanolamines, surfactants and hydrochloric acid (HCl).

HB Fuller said its fiscal Q3 demand was strong for packaging, hygiene, tissue and towel and health and beauty. It also highlighted new energy, which includes solar panels and wind turbines.

By Al Greenwood

Additional reporting by Joseph Chang

Thumbnail shows money. Image by Al Greenwood.

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