Rising Raw Material Costs Start to Take Their Toll

EARNINGS OUTLOOK

Although chemical industry sales and profits were generally on the rise in 2004, high raw material and energy costs have caught up with at least three companies.

Eastman Chemical reported last week that its fourth-quarter earnings will fall below the low end of the 42- to 63-cents-per-share range it estimated in October. The company says it expects that its costs for raw materials and energy--including p-xylene, ethylene glycol, and propane--will have increased by more than $100 million in the fourth quarter compared with the third, which is much more than forecasted.

Albemarle expects its fourth-quarter earnings, to be reported Feb. 3, to come in between 38 and 45 cents per share, below the 51 cents that analysts, on average, were predicting. The company says raw material and energy costs increased more than $30 million during 2004, and that half of the increase was in the fourth quarter.

Likewise, Georgia Gulf announced last month that it anticipates fourth-quarter earnings to be near the low end of analysts' estimates, which range from 74 to 89 cents per share. CEO Edward A. Schmitt said in a conference call that, despite unusually strong demand in the quarter, the rise in costs for aromatic raw materials is outpacing the company's ability to pass on price increases.

Frank J. Mitsch, a stock analyst with Fulcrum Global Partners, notes that much of the pressure for Eastman is in its specialty chemical business, which can't quickly pass raw material cost increases on to customers. He says Eastman's announcement heightens his concerns about fourth-quarter earnings for specialty chemical companies such as Rohm and Haas.

Eastman expects things to go its way again in the first quarter of this year. The company says sales volumes should remain strong and that the raw material and energy cost run-up should moderate. With the help of anticipated price increases, the company believes that "profit margins will increase substantially in first-quarter 2005 from fourth-quarter 2004 levels."