Issue Date: August 21, 2006
A Modest Rise For Chemical Earnings
It takes only one company, especially if that company is the largest in the U.S., to bring down the chemical sector's earnings growth. This is what happened in the second quarter of this year for C&EN's sample of 24 major U.S. chemical firms.
C&EN's survey showed earnings rising a slight 0.4% when compared with the same period in 2005, to $3.94 billion, on a sales improvement of 6.6% to $50.1 billion. Earnings are from continuing operations, excluding significant extraordinary and nonrecurring items. The aggregate profit margin for the group was a still-respectable 7.9%, compared with 8.3% in the second quarter of last year.
However, Dow Chemical really hurt aggregate earnings for the group with a 19.1% earnings decline, despite good sales growth of 9.2%. Without Dow, the remaining companies showed a 9.7% increase in earnings to $2.92 billion.
Dow reports that increasing energy and feedstock costs outpaced its ability to raise prices on its products, a statement that has been cropping up more and more often in the U.S. chemical industry.
For the first six months of 2006, earnings for the 24 companies were down 0.7% to $7.87 billion, while sales rose 5.5% to $98.2 billion. This performance yielded a first-half profit margin for the group of 8.0%, down from 8.5% in the first half of last year.
Government data show what is happening in some chemical sectors. According to Federal Reserve Board figures, second-quarter output of all chemicals rose just 0.4% from the same period in 2005 to an index of 104.4 (2002 = 100). But the production index for the important, but highly cyclical, basic chemicals sector declined 0.9%. This is much better than the 7.1% drop in the first quarter, but that three-month period was still being affected by plants brought down by last year's Gulf Coast hurricanes.
Meanwhile, prices jumped. The producer price index for all chemicals rose 9.4% in the second quarter to 205.8 (1982 = 100), Labor Department figures show. And the index for the industrial chemical sector, which is essentially analogous to the Federal Reserve's basic chemicals sector, increased 17.5% to 212.7.
The increase in chemical prices produced a significant rise in the value of total chemical shipments. Demand for all chemicals, according to the Commerce Department, had a value of $146.5 billion in the second quarter, up 7.4% from the 2005 period.
The Commerce Department does not provide a shipments value for each of the chemical sectors, but it does give a value for pharmaceutical shipments. Subtracting drug shipments from the total shows that demand for chemicals, excluding pharmaceuticals, increased only 4.3% in the quarter, despite the increase in prices, to $106.3 billion.
Because costs and pricing power vary for different chemical companies, there was a wide range of results across the 24 companies for the quarter. Seventeen showed earnings gains, ranging from 4.4% at DuPont to 286.3% at Georgia Gulf. The declines ranged from 3.8% at Cabot to 75.5% at fertilizer producer Terra Industries.
Georgia Gulf came off a poor performance in the second quarter of last year to more than triple its earnings to $39.4 million on a 3.1% increase in sales to $602 million. Its profit margin for the quarter rose to 6.5% from a meager 1.7%.
The company says chlorovinyls sales prices and volumes increased during the quarter, resulting in record quarterly operating income of $83.7 million for this segment. And its aromatics segment had an operating loss of just $500,000, compared with $8.8 million in the same period a year ago, as lower benzene costs offset lower sales volumes and higher propylene costs.
The other triple-digit gain was at Nalco Holding, which posted a 226.2% jump in second-quarter earnings to $26.1 million on a 6.5% rise in sales to $891 million. Profitability rose to 2.9% from 1.0% in last year's second quarter. The company's energy services segment delivered all of its growth in the quarter.
Most of the companies reported double-digit earnings increases. Albemarle led this pack with a 49.3% earnings rise to $43.3 million as sales improved 13.1% to $569 million. Profitability was 7.6% compared with 5.8% in the second quarter of last year.
"All three business units showed improved earnings and margins compared to the same period last year," CEO Mark C. Rohr says. "Our team is performing well, building Albemarle's innovation and service model, addressing underperforming assets, mitigating costs, and working with customers to introduce new products."
Celanese, which like Nalco is an old company recently out of private ownership, scored a 35.6% earnings increase to $122 million as sales rose 11.2% to $1.67 billion. According to the firm, results were driven by strong affiliate performance, fewer special charges, and significantly improved performance, particularly in the acetate products segment. All of these gains offset increased raw material costs in the quarter.
Industrial gases producers did well in the three-month period. Praxair showed a 22.3% increase in earnings to $247 million, as a result of new business development, higher prices, and productivity improvement. Sales grew 8.2% to $2.08 billion. "While some macroeconomic indicators point to a slowdown, we have not seen any significant decline in demand from our customers," CEO Dennis H. Reilley notes.
At Air Products & Chemicals, earnings growth was lower, but sales growth higher than at Praxair. Earnings rose 14.5% to $210 million, while sales were up 11.6% to $2.32 billion. CEO John P. Jones III says, "This performance was powered by strong volumes across our global energy and process industries, electronics, and merchant gases businesses, demonstrating the strength of our business and market positions to continue to deliver profitable growth and higher returns."
Sales in the company's chemical segment, however, were essentially unchanged from the 2005 quarter at $480 million. And chemical segment operating profits were down 10%, largely because of two customer shutdowns in Air Products' polyurethane business in the past year.
Of the 17 firms showing positive growth, the lowest percentage increase was at the number two chemical company, DuPont, where earnings were up 4.4% to $944 million on a 0.9% drop in sales to $7.44 billion. The company says second-quarter earnings reflect higher local selling prices across all regions, lower fixed costs, and the impact of higher energy and ingredient costs.
Earnings, of course, were not up at all companies. The largest decline came at Terra Industries, where earnings plummeted 75.5% to just $5.0 million, despite a 4.9% increase in sales to $524 million. Second-quarter ammonia and ammonium nitrate selling prices were higher than those of the 2005 quarter, but the increases were more than offset, the company says, by higher natural gas costs, lower selling prices for nitrogen solutions, and about $7.5 million for repairs and purchased ammonia following a June 1 explosion at its Billingham, England, ammonia plant.
The largest dollar decline came at industry leader Dow, where earnings fell $242 million, or 19.1%, to $1.02 billion on a 9.2% improvement in sales to $12.5 billion. The company notes that sales volume for the quarter increased 4% from the same period in 2005 and that prices were up 5%. But Geoffery E. Merszei, the company's chief financial officer, says these gains were "not enough to keep pace with rising feedstock and energy costs, which were $1.6 billion higher in the first half of 2006 than in the same period a year ago. "To put this in perspective, this was our 16th consecutive quarter of year-over-year increases [in energy costs]-the last nine above 18%," Merszei says. "Given the challenges of the first half, we believe it will be difficult to meet our earlier expectations that earnings in 2006 will be better than in 2005," he adds.
At Eastman Chemical, second-quarter earnings were down 10.8% to $116 million on a 10.1% sales increase to $1.93 billion. Still, CEO J. Brian Ferguson says he expects solid results for the second half of the year. "In addition, we anticipate high and volatile raw material and energy costs, particularly for p-xylene and propane," Ferguson notes. "We also expect sales volume to be somewhat lower due to normal seasonality and planned maintenance."
At Rohm and Haas, earnings were up 11.6% to $192 million on a 5.2% sales rise to $2.08 billion. CEO Raj L. Gupta expects the pressure from volatile and high raw material and energy costs to continue throughout the remainder of the year, but he says the economic environment of the company's key end markets remains sound and provides a foundation for solid performance throughout 2006.
This story has been revised since it appeared in print on August 21. This online version is the correct one. Correction details can be found in the September 4 Letters section.
Criteria For C&EN Earnings Analysis
C&EN's quarterly report on financial performance of the U.S. chemical industry contains data from 24 major U.S. basic chemical companies and from five petroleum companies, each of which has more than $1 billion in annual chemical sales.
To be included in the table of basic chemical companies, a company must have at least 50% of its sales in chemicals.
In referring to chemical sales, C&EN means sales of chemicals for which the 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.
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