Issue Date: July 6, 2009
Recession Takes Bite Out Of Earnings
From the vantage point of 2009, it's incredible that, in both the U.S. and Canada, chemical prices and shipments increased in 2008. Corporate data paint a more accurate picture of the year. High prices and healthy shipments were not strong enough to protect profits for most of the world's chemical firms. By the fourth quarter, massive inventory destocking pummeled demand, and it was not clear when—or whether—it would return to prior levels.
In the first half of 2008, the global chemical industry battled high energy and feedstock prices and flat or shrinking demand in the U.S. and Europe. Industry leaders looked to the buying power of emerging markets in Asia and South America to supply revenues.
As the year wore on, the economic slowdown hit the chemical industry in waves. The market for construction materials was the first to fail, because of the bursting of the real estate bubble. Then demand for products aimed at the automotive and electronics markets declined toward the end of the year as consumer spending eroded. Even high-growth economies such as China cut back on industrial production.
Companies supplying the agriculture sector bucked the trend of falling demand. High prices for food commodities drove farmers to invest in their land to increase output. Strong demand for fertilizers and agricultural chemicals boosted profits for firms such as Terra Industries, whose 2008 earnings tripled compared with 2007.
Although conditions worsened as 2008 went on, broad economic data suggest that the business of chemistry was reasonably strong for the year as a whole. In the U.S., overall chemical shipments jumped by 9.6%, compared with 9.0% in 2007. Agricultural chemicals led the pack with a 29.8% increase. On the other hand, shipments of coatings and adhesives, which were hurt by the construction slowdown, declined by 8.8% compared with an increase of 8.2% in 2007. Prices rose for all chemicals, especially agricultural products, whose prices soared by 54.0%.
In Canada, chemical shipments rose 4.1% compared with 2007. Again, the strongest gain was in agriculture, with shipments up 31.7%. Canadian chemical prices jumped by 10.2%. In Europe, growth of chemical shipments slowed but stayed positive in Belgium, Germany, the Netherlands, and Spain.
Still, the earnings picture was a mess. The sharp drop in demand resulted in lousy third- and fourth-quarter earnings that wiped out previous gains for a large portion of the chemical enterprise. In the U.S., 16 of 29 companies surveyed by C&EN saw full-year earnings decline from 2007. Similarly, two of the four Canadian companies surveyed had worse results than in the previous year. Not surprisingly, Canadian fertilizer companies Agrium and PotashCorp saw huge earnings increases.
The picture was worse in Europe, with 2008 profits shrinking at 11 of 19 firms that C&EN surveyed. Fiscal-year reports from Japan showed a total wipeout, with all 12 firms tracked by C&EN suffering significant earnings declines and with half of the group reporting losses. Companies with large exposure to the petrochemical business, such as Mitsubishi Chemical, Mitsui Chemicals, and Sumitomo Chemical, fared exceptionally poorly.
Even the pharmaceutical industry's financial results were weak. The drug business is generally well insulated from economic cycles, because its products are a necessity for many consumers. But other factors contributed to lower 2008 earnings at three of eight firms in the U.S. and four of five in Europe. The industry continued to struggle as blockbuster drugs came off patent and generics ate into market share. Manufacturing problems and safety concerns for other drugs added to the headaches. Meanwhile, three of four U.S. biopharmaceutical firms booked solid earnings results for the year, powered by drugs like Amgen's cancer treatment Avastin and Biogen Idec's two multiple sclerosis drugs Avonex and Tysabri.
Most chemical firms felt confident that their strong balance sheets, built up during the years since the 2000–01 recession, would help them weather the storm. But by the end of the year, falling earnings and higher costs for credit led to reorganizations and cost-cutting programs at many firms.
On a positive note, the cutbacks did not affect 2008 spending on long-term assets or R&D, likely because much of the money was earmarked in 2007, when the economic outlook was sunnier. In the U.S., capital spending at surveyed companies shot up 18.6%, and R&D spending continued to grow, expanding by 6.0%. Pharmaceutical company spending on R&D was up, but at a slower rate, increasing only 3.4%.
In Canada, capital spending increased at all surveyed firms. The agriculture boom spurred investment by PotashCorp, which contributed greatly to the more than 60% increase in spending for the group.
Capital spending in Europe continued to rebound from its low point in 2004. Led by Air Liquide, Linde, and Solvay, European chemical companies tracked by C&EN hiked investments by 17.6%. Chemical R&D spending in Europe rose by 5.4%.
Japanese chemical firms were ahead of their North American and European counterparts when it came to cutting back on capital spending. After four years of growth, the companies shrank outlays by 13.4%. Chemical companies outside of Japan have pledged to sharply curtail capital spending in 2009, although they say they will not cut spending on R&D, calling it the lifeblood of their businesses. Likewise, in Japan, spending on R&D increased by a healthy 8.7% for the year.
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