Chemical Company Earnings Soar

Chemical company earnings surged in the first quarter as production and prices increased, demand for U.S. chemical products rose over the same period in 2003, and firms continued to cut costs. Combined, these three factors generally offset increased raw material and energy costs.

Total earnings from continuing operations, excluding unusual items, at 24 of the 25 chemical companies regularly surveyed by C&EN rose 79.4% to $2.50 billion as total sales for the group increased 14.7% to $35.1 billion. (Crompton is not included because of large unusual gains that cannot be stripped out of its results.) And the aggregate profit margin for the group jumped to 7.1% from 4.6% in the comparable quarter of last year. This is the best profitability seen for the surveyed companies since the second quarter of 2000, when the profit margin was 9.6%.

The 79.4% earnings increase among the chemical companies was much greater than that for 10 diversified and other chemical producers, whose combined earnings rose 47.0% to $1.29 billion on a sales increase of 13.1% to $17.8 billion.

Industry fundamentals were good in the first quarter. Total U.S. chemical production rose 3.8%, according to Federal Reserve Board data, and the Labor Department reports a 3.6% increase in prices for all chemicals. Demand was good, with Commerce Department data showing total chemical shipments rising 7.1%.

Getting closer to the products of the companies in the survey, basic chemical production was up just 1.9%. But both prices and shipments of basic chemicals beat the broader industry data. Prices for the important industrial chemical sector rose 4.1% over the same period a year ago, while shipments of all chemicals, excluding pharmaceuticals, increased 12.3%, slightly less than the 14.7% increase in sales for the 24 chemical companies.

Industry leader Dow Chemical exemplifies the pattern in the first quarter. Chief Financial Officer J. Pedro Reinhard told a group of securities analysts that "Dow's first quarter can be characterized by the following major drivers: strong volume, favorable price momentum, and good control on expenses, offsetting historically high feedstock and energy costs."

Looking at the quarter overall, he said, sales increased 15.2% to $9.31 billion. Volume was up 7.0%, "and this is the first time that all operating segments have posted year-over-year volume growth since the second quarter of 2000." Prices increased 8.0%, with the strongest gains in the chemicals and plastics segment, according to Reinhard.

Reinhard said feedstock and energy costs increased $100 million from the same quarter in 2003, but he also pointed out that Chief Executive Officer William S. Stavropoulos had predicted in January that these costs would rise by more than $300 million from the fourth quarter of 2003 to the first quarter of 2004. In fact, they rose more than $400 million. Despite this increase, Dow's earnings more than quintupled to $469.0 million from the first quarter of 2003. And its earnings as a percentage of sales increased to 5.0% from 1.1%.

Dow also had the largest dollar increase in earnings--$384.0 million, somewhat ahead of DuPont's $349.0 million jump.

Number two DuPont's earnings increased 56.7% to $964.0 million, keeping its place as the earnings leader. Sales at the company were up 15.2%, the same percentage growth as at Dow, to $8.07 billion. The company's profit margin rose to 11.9% from 8.8% in the same period last year.

Like Dow, DuPont's sales volume increased 7.0% in the quarter. "We are off to an excellent start in 2004," CEO Charles O. Holliday Jr. says. "Each of the five DuPont growth platforms"--agriculture and nutrition, coatings and color technologies, electronic and communication technologies, performance materials, and safety and protection--"delivered strong results, exceeding our earnings expectations across all businesses and regions."

While Dow and DuPont had big dollar increases in earnings for the quarter, they were not the leaders in percentage growth. These prizes go to Great Lakes Chemical, up 7,344%; Eastman Chemical, up 883%; and FMC Corp., up 632%. These three companies, however, all grew from a very low base.

Great Lakes's huge percentage rise came as earnings jumped from just $900,000 in the first quarter of last year to $6.7 million in the 2004 period. Sales at the company rose 10.2% to $368.1 million. CEO Mark P. Bulriss attributes the improved performance to a combination of the strengthening global economy and the firm's efforts to boost productivity, manage assets better, and satisfy customer and market needs.

Eastman's earnings rose $833% to $59.0 million as sales increased 10.8% to $1.60 billion. CEO J. Brian Ferguson says: "Our first-quarter results clearly indicate that we are making progress toward improving the profitability of the company. This strong performance reinforces our resolve for taking the necessary actions to continue to improve the company's financial results." Eastman's profit margin increased to 3.7% for the quarter from a scant 0.4% in the 2003 period.

And FMC's 632% earnings increase to $13.9 million came on a 16.5% sales rise to $505.7 million. "We had a great start in 2004, a year that we expect to be a major turning point in our financial performance," says William G. Walter, the company's CEO. "We significantly exceeded the expectations we had set at the beginning of the quarter due to outstanding performance in our agricultural products segment."

THERE WERE JUST two earnings decliners at the companies on the list: Albemarle and H.B. Fuller. Fuller's earnings declined 27.0% to $4.6 million, despite an 8.1% increase in sales, as increased costs cut into earnings. However, CEO Al Stroucken says: "We are pleased to have realized volume improvements in all regions this quarter. New products, improved processes, fresh ideas, and energized associates will allow us to fully participate in the improved economic environment."

Albemarle's earnings declined just 1.2% to $16.5 million on a 20.7% sales rise to $322.0 million. Earnings were affected by the idling of the company's zeolite assets, one-time costs associated with the acquisition of Atofina's bromine business, and higher raw material costs.

Cambrex, the smallest company on the list in terms of sales, had a 15.5% increase in earnings to $11.2 million as sales rose 8.2% to $112.6 million. James A. Mack, CEO of the pharmaceutical chemical producer, says: "We are encouraged by the progress we've made in the human health and biopharma segments, resulting from our new product programs, investments in sales and marketing, and more favorable market conditions. We continue to increase the resources dedicated to identifying and pursuing new development and manufacturing opportunities that will result in improved performance in the biopharma business."

In spite of the higher costs, most executives are optimistic about the economy and its effect on their firms. Dow's Reinhard says: "For the chemical industry, improvements in global gross domestic products and industrial production should drive higher demand. With limited additional capacity additions expected during the course of this year, supply-demand balances should continue to tighten."

He warns, however, that oil and natural gas prices are expected to remain high and volatile. "While U.S. natural gas prices may soften somewhat in the coming months, a significant decline during the year is not expected," he says. "We continue to be cautiously optimistic about the future. We will continue to focus on institutionalizing the savings accomplished in 2003."

At Ferro, CEO Hector R. Ortino says: "Our optimism about the sustainability of the economic recovery in North America continues to grow. Market conditions in the Asia-Pacific region are expected to remain strong, while a recovery in our key end markets in Europe will challenge us in the short term. We continue to deal with higher raw material costs, but we are confident that higher volumes and price increases will help us offset the higher input costs."

Rohm and Haas CEO Raj L. Gupta says that although the overall economic outlook is positive, significantly higher raw material costs and the uncertainties over currency exchange rates will temper the full impact of sales growth on earnings. "We expect to continue to see higher demand as a result of the economic recovery," Gupta says, "as well as gains made through market share and new products we are introducing into the marketplace."

Costs also are much on the mind of Cytec Industries CEO David Lilley: "We are pleased with our strong start for 2004, and we continue to execute on the factors we can control. However, our latest forecast, which was provided in January 2004, assumed a moderation of raw material and energy costs. We now expect the trend of higher raw material costs to continue, and this will have an adverse effect on our two specialty chemical segments."

DOWNLOAD A PDF DATASHEET of chemical industry results for the first quarter of 2004.