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Earnings Soar, Thanks to Dow

Industry leader masks still-lackluster performance of many chemical firms

February 23, 2004 | A version of this story appeared in Volume 82, Issue 8

Sometimes one company--especially when it's a very large company--can completely skew an industry's financial results. So it was in the fourth quarter of 2003 when Dow Chemical scored huge earnings growth over the 2002 quarter.

However, take away Dow's improvement--from a loss of $172 million in the 2002 fourth quarter to a gain of $475 million in the 2003 period--and the result is a much more modest 12.2% increase in total earnings. In fact, Dow's $647 million growth in earnings made up 84.5% of the total earnings growth of the 23 companies.

The distribution of ups and downs was interesting. Thirteen of the 23 firms saw an earnings improvement in the quarter. This includes four companies that went from red ink in 2002 to black in 2003 and one, Arch Chemicals, that showed a smaller loss than it did the year before. The other 10 companies had lower earnings in 2003 than in 2002, including Stepan, which showed a loss in the fourth quarter against positive earnings the year before.

While the chemical economy was turning in a reasonably good performance in the fourth quarter, the industry still had to cope with high raw material costs. DuPont Chief Executive Officer Charles O. Holliday Jr. is pointed about this: "Even with clear evidence that an economic recovery in manufacturing is under way, energy-related raw material costs stayed stubbornly at or near historic highs." The company's higher raw material costs, he says, reduced fourth-quarter earnings by about $230 million after taxes, compared with the same quarter in 2002.

Dow notes that feedstock and energy costs were 15% higher than a year earlier, although the company says a 12% increase in prices and an 8% increase in volumes helped to offset the higher costs.

Dow's pricing certainly outperformed the government's producer price index for chemicals. According to Department of Labor data, prices for chemicals and allied products increased an average 4.6% for the quarter from the year-earlier period. The index for industrial chemicals rose 6.5%.

Production, which has been lackluster all year, finally picked up in the fourth quarter, according to Federal Reserve Board data. The production index for all chemicals in the fourth quarter rose 3.3% from the prior October-to-December period. This is the largest increase in chemical output since the second quarter of 2000, when the index rose more than 4%. Output of basic chemicals trailed that of the total chemical industry, increasing 2.8%.

Demand was strong in the fourth quarter, according to Commerce Department data. Shipments of all chemicals rose 8.8% from the same period the year before to $119 billion. Remove pharmaceuticals, and shipments of all other chemicals increased an even greater 12.2% to $90.0 billion.

As might be expected, the increase in shipments excluding pharmaceuticals is fairly close to the sales growth for the diverse group of chemical companies in the C&EN survey. Sales of the 23 firms were slightly higher than the government numbers, rising 14.7% in the quarter to $30.4 billion. The group's total earnings of $1.56 billion produced an average profit margin of 5.1%, up from 3.0% a year earlier.

To be fair, Dow had a huge impact on all of these numbers. Excluding Dow, sales for the group were closer to the government demand increase, rising 12.9% for the quarter to $22.0 billion. And a still-respectable earnings increase of 12.2% to $1.09 billion produced an average profit margin of 4.9%, down just slightly from the 5.0% margin posted a year earlier.

While the largest dollar gain in earnings came at Dow, the largest measurable percentage increase was at Rohm and Haas, where earnings increased 97.1% to $134 million as sales rose 14.8% to $1.65 billion. The company's profit margin improved to 8.1% from just 4.7%.

"The improving global economy, combined with the market position we have in most businesses, contributed to a strong quarter," says Rohm and Haas CEO Rajiv L. Gupta. "We are finally seeing a recovery in the electronics markets, and the continued consumer shift to all-acrylic house paints is having a positive impact on our coatings business." He also notes some recovery in the industrial sector during the quarter and severe winter weather late in the quarter that favorably impacted the company's salt business. "Our fourth quarter started out strong and ended with solid sales performance in December," he says.

Coatings were also good to PPG Industries, where quarterly earnings rose 32.7% to $130 million on a 9.3% increase in sales to $2.18 billion, raising profitability to 6.0% from 4.9%. According to CEO Raymond W. LeBoeuf, "We produced solid earnings for the quarter, thanks to improved cost performance, increased volumes across all of our businesses, stronger pricing in commodity chemicals, the growing success of our optical products business, and the strengthening of the euro."

Operating income at two of PPG's businesses increased substantially. For coatings, operating income rose 24.5% to $181 million, while in chemicals it jumped 50.0% to $51.0 million. Glass, however, despite an increase in sales, saw operating income fall 62.1% to $11.0 million.

The two industrial gas companies on the list--Air Products & Chemicals and Praxair--had earnings increases, but there was a big difference in magnitude. Praxair's fourth-quarter earnings rose 10.7% to $155 million on a 12.6% sales increase to $1.46 billion, while Air Products' earnings edged up just 2.4% to $132 million on a 16.4% sales rise to $1.68 billion.

Praxair noted double-digit sales and operating profit growth in Europe, South America, and Asia. Air Products, on the other hand, was hurt by its chemicals business. Its gases segment had an 8.5% increase in operating profit to $182 million, offset by a 26.3% decline in its chemicals unit to $24.5 million and a small loss in the company's equipment segment. Air Products' total segment income, therefore, increased just 0.6% to $206 million.

The long-suffering fertilizer business seemed finally to improve in the fourth quarter. IMC Global eked out earnings of $100,000 compared with a loss of $33.4 million in the same period a year earlier. And Terra Industries went from a $16.7 million loss in fourth-quarter 2002 to a $8.8 million gain.

IMC CEO Douglas A. Pertz comments: "While ammonia costs and diammonium phosphate selling prices both increased substantially, the rate of DAP price improvement was greater in the latter part of the quarter, with DAP prices continuing to strengthen into 2004. While we did not see the full impact of these increases, they bode well for a strong start in 2004." Pertz also cites strong potash performance in the quarter, with net sales and gross margins improving 14% and 30%, respectively.

Terra notes that its nitrogen business had fourth-quarter sales of $318 million and operating income of $32.4 million, compared with sales of $230 million and an operating loss of $16.5 million in fourth-quarter 2002. "We are pleased to end 2003 with our strongest quarter in three years," CEO Michael L. Bennett says. "Strong global grain demand and prices have created a more favorable near-term outlook for the nitrogen products industry."

While most of the firms had improved earnings, there were those that saw declines. Chief among these in dollar terms was DuPont, where, despite a 14.0% increase in sales to $6.48 billion, earnings declined 14.2%, or $49.0 million, to $296 million.

But there were many others with much larger measurable percentage declines. Most often, it seems, when earnings dropped, they really dropped. The largest percentage drop was at Great Lakes Chemical, where earnings declined 95.2% to $400,000, despite a 4.0% increase in sales to $340 million. Factors involved in the decline include higher raw material costs, lower prices, and lower volumes.

For the full year, Dow's big increase again saved the day for the chemical industry. For the group, total earnings increased 4.6% to $5.94 billion as sales rose 12.2% to $117 billion. This produced an aggregate profit margin of 5.1%, down slightly from 5.5% in 2002.

But without Dow, cumulative earnings were off 13.6% on a 10.0% sales increase, and the profit margin for the group fell to 5.5% from 7.1%.

There seems to be enough good news going into 2004, however, that chemical company executives are more optimistic than they have been for some time. Still, many remain cautious.

DuPont's Holliday says: "We saw strong economic growth in the fourth quarter and believe it will continue to gain momentum in 2004. Indeed, we believe that 2004 may provide the best global economic improvement we've seen in several years."

And at Dow, CEO William S. Stavropoulos says: "Looking into 2004, we expect that global economic growth will improve chemical industry demand, tightening industry supply-demand balances. However, there is still uncertainty due to feedstock and energy costs, which will remain high and volatile."

Ferro CEO Hector R. Ortino sums up the outlook well. "We are cautiously optimistic about the sustainability of the economic recovery that appears to be taking shape in North America," he says. "Conditions in the Asia-Pacific region are expected to remain strong, but a recovery in our key markets in Europe will likely lag North America. Raw material costs will continue to pressure margins as we move through the first quarter of 2004, but higher volumes and price increases will help us to offset the higher raw material costs."






Chemical Earnings Jump

Just as at chemical companies, major oil companies saw their earnings soar in the fourth quarter. But also like results at the chemical companies surveyed by C&EN, the oil company earnings were pumped up by one major producer--in this case, ExxonMobil.

For the five major oil companies with significant chemical operations, earnings from those operations almost quadrupled in the fourth quarter, rising 289% to $587 million. But while all of the companies except ChevronTexaco posted higher chemical earnings compared with fourth-quarter 2002, ExxonMobil's 526% growth weighed more heavily. Without ExxonMobil, total earnings for the other four companies rose 19.4%. ExxonMobil attributes its fourth-quarter growth to stronger margins and favorable foreign exchange rates.

Sunoco had the next largest earnings growth, increasing 52.9% to $26.0 million. The company saw higher margins in polypropylene and higher sales volumes, which were up 5% over fourth-quarter 2002.

Occidental Petroleum's 22.4% earnings growth to $71.0 million was the result of higher prices in all of its major products--polyvinyl chloride, ethylene dichloride, chlorine, and caustic soda--partially offset by higher energy and ethylene costs.

In contrast, chemical earnings at ChevronTexaco fell 76.9% to just $3.0 million. The company notes that a decline in results for its Oronite fuel and lubricating oil additives subsidiary more than offset an improvement in profits at its 50% owned Chevron Phillips Chemical affiliate.

For the full year, the five companies had combined chemical earnings of $1.77 billion, an increase of 70.1% over 2002.


C&EN's quarterly report on financial performance of the U.S. chemical industry contains data from 25 major U.S. basic chemical companies and from 11 diversified companies, each with more than $200 million in annual chemical sales.

To be included in the table of basic chemical producers, a company must have at least 50% of its sales in chemicals.

In referring to chemical sales, C&EN means sales of chemicals whose molecular composition has been changed during manufacture. Hence, these include traditional categories of basic petrochemicals and inorganics, organic intermediates and inorganic compounds, polymers such as plastics and fibers, and agricultural chemicals and specialty derivatives.

In listing earnings, the report gives after-tax income for continuing operations, excluding significant nonrecurring and extraordinary items.

Occidental Petroleum71.058.022.4210.0111.089.2
a Percentages calculated from combined earnings. nm = not meaningful.


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