INSIGHT: Chems face rough earnings season amid warnings, lower margins

HOUSTON (ICIS)–Chemical companies have kicked off the earnings season by waring that they could miss analysts’ estimates and struggle to keep up with rising costs.

• HB Fuller’s fiscal Q4 and full year earnings fell below the guidance it issued in September.
• ExxonMobil warned that lower industry margins could cause a $400m-600m quarter-on-quarter decline in Q4 earnings in its Chemical Products business.
• Companies in the paints and coatings market warn of weaker demand.

WEAK CONSTRUCTION
Companies that serve the paints and coatings markets were among the first to warn about difficult conditions.

Back in late November, Chemours warned that its earnings were tracking below its 2022 guidance. Demand for its titanium dioxide (TiO2) had weakened in the fourth quarter, most notably in Europe and Asia.

Chemours also makes fluorochemicals and fluoropolymers, and these markets were experiencing the higher costs and seasonal trends that the company had expected at the time.

A couple of weeks after Chemours’s comments, TiO2 producer Tronox warned that its Q4 earnings will fall below guidance, mainly because of a fire at a mineral separation plant and floods at two mines.

At the time, Tronox’s TiO2 volumes were tracking on the low end of its earlier guidance.

At the start of 2023, RPM International warned that its upcoming quarterly earnings could fall year on year for the first time in five quarters. RPM makes paints, coatings, adhesives and sealants. After its warning, shares of other paint producers fell by more than 2%.

HB Fuller, a US adhesives producer, missed its fiscal Q4 and full-year guidance because of a sharp drop in demand in its Construction Adhesives Segment, China’s strict COVID lockdowns and unfavourable exchange rates. HB Fuller’s fiscal fourth quarter and fiscal year ended on 3 December.

The company expects global economic activity will remain weak in 2023.

COMPANIES REDUCE PURCHASES AS SUPPPLY CHAINS RETURN TO NORMAL
RPM said that improvements in supply chains have led some of its customers to slow down purchases.

These customers are more confident that they can get their supplies on time, leading them to pursue inventory policies that are more normal. Demand has fallen for products made by some of RPM’s businesses, and the company expects that trend will continue during its fiscal third quarter, which runs through February.

RPM itself is adopting more normal buying patterns, and it is adjusting its inventory levels to more typical level.

As a result of those inventory adjustments, the company is lowering production rates at some of its plants. It could take RPM six to nine months to bring inventory levels back to where the company wants them.

RPM’s comments were collaborated by the Federal Reserve’s Beige Book, a summary of recent US economic activity. The latest Beige Book covers the six weeks that ended on 9 January.

Fed contacts in the Atlanta district that they plan to bring their inventory levels back to more normal levels. These companies plan to return to just-in-time inventory management instead of the just-in-case practices that characterised the pandemic.

The Atlanta district includes the states of Georgia, Florida, eastern Tennessee and the southern parts of Mississippi and Louisiana.

In the Richmond district, a fabric producer said some of its customers are reducing inventory levels because of concerns about lower demand. The Richmond district includes the states of Virginia, Maryland, North Carolina and South Carolina.

MARGINS REMAIN COMPRESSED
ExxonMobil’s update from the start of 2023 shows that the decline in industry margins could take a big bite out of quarterly margins.

The company expects lower margins will knock off $400m-600m from its Q4 chemical earnings when compared sequentially with the third quarter. During the third quarter, ExxonMobil’s Chemical Products sector reported $800m in earnings excluding identified items.

Margins are falling in part because a lot of new plants have started operations.

Also, the economy is slowing down. Kevin Swift, the ICIS chief economist, expects the US will enter a relatively mild recession in 2023.

A downturn will make it harder to pass through rising costs. If companies are paring back purchases – as RPM warned in its earnings call – then that would make margin expansion even more difficult.

EMERGING TRENDS FOR 2023
Chemical companies could provide clues on the trajectory of China’s reopening.

Swift warned that it could be choppy because the virus still has to work its way through the population. He expects the economy of China will expand by 4.4% in 2023, up from 3.1% in 2022.

Companies could also provide more insight into improvements in supply chains and whether they are causing companies to pare down inventories.

The US passed several laws to fund programmes to build infrastructure, semiconductor plants, renewable energy and electric vehicles. Companies could comment on whether these programmes are increasing demand for chemicals and plastics.

A longer-term trend is reshoring and friendshoring, in which companies move manufacturing capacity closer to their end markets so they can avoid future disruptions caused by natural disasters, pandemics or geopolitical tensions.

Insight article by Al Greenwood

Additional reporting by Joseph Chang

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