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Chemical Earnings Show Increase

Aggregate rise in earnings among 25 chemical firms was 11.3% in the second quarter, with 18 companies seeing higher results

by William J. Storck
August 20, 2007 | A version of this story appeared in Volume 85, Issue 34

Credit: View larger image
Credit: View larger image

THE U.S. CHEMICAL INDUSTRY posted relatively good sales and earnings increases in the second quarter over second-quarter 2006, especially when compared with a lackluster year-over-year first-quarter increase.

Chemical Industry 2007
Credit: NOTE: All sales, earnings, and profit margin data are based on chemical companies listed on page 29. SOURCES: Federal Reserve Board (production data), Department of Labor (prices data)
Second-quarter results
Credit: NOTE: All sales, earnings, and profit margin data are based on chemical companies listed on page 29. SOURCES: Federal Reserve Board (production data), Department of Labor (prices data)
Second-quarter results

In the second three-month period this year, aggregate earnings for the 25 major U.S. chemical firms that C&EN surveys rose 11.3% to $4.26 billion from the comparable period in 2006, as sales increased 7.8% to $49.3 billion. These results are much improved from those of the first quarter, when earnings rose just 0.7% from the year-earlier period on a sales increase of only 5.6%. Earnings are from continuing operations, excluding significant nonrecurring and extraordinary items.

The total profit margin for the group of companies in the second quarter was 8.6%, up from 8.4% in the second quarter last year and from 8.0% in first-quarter 2007.

The lower results in the first quarter naturally pull the results for the first half down. In the first six months, sales for the companies totaled $95.6 billion, a 6.8% increase from first-half 2006, while earnings rose 8.3% to $7.95 billion. Profitability for the group rose to 8.3% from 8.2% in the first six months last year.

The increases in the second quarter generally came from improving economics both for the U.S. as a whole and for the chemical industry itself. Growth in gross domestic product rose significantly over what it had been the quarter before. The government's estimate of growth of second-quarter GDP, which will be revised twice before it becomes official, was 3.4% during the three-month period. This is a far cry from the slim 0.6% sequential growth in GDP in the first three months of the year.

Then there were the chemical data, which were not spectacular but did provide the framework for the growth. Production of all chemicals, including pharmaceuticals, fell 0.5% to an index of 109.9 (2002 = 100). Output of the important basic chemicals sector, which more closely reflects products that either are made or are used by the 25 companies, increased 2.7% to an index of 117.4.

Basic chemicals also outperformed the total industry in pricing. The producer price index for all chemicals increased 3.7% from second-quarter 2006 to 223.1 (1982 = 100), while the index for basic chemicals rose 4.9% to 223.4.

Demand for U.S. chemicals also improved. The value of shipments rose 2.5% to $158.4 billion in the second quarter over the comparable period last year. Excluding pharmaceuticals, the shipments value for the remaining chemical sectors totaled $115.9 billion, a 4.6% increase over the 2006 period.

The range of percentage changes in earnings among the companies was very wide in the second quarter. At the top end, Terra Industries' earnings grew 1,288% to $69.4 million on sales growth of 32.5% to $693.8 million. At the other end of the spectrum, Ferro's earnings fell 56.2% to $4.6 million, even as sales edged up 2.8% to $553.7 million. Ferro's earnings, however, included a pretax charge of $10 million. Had this been excluded, Ferro's earnings would have risen.

Terra and fellow fertilizer producer Mosaic, which is new to C&EN's list, were the earnings-growth stars of the quarter, driven by increased corn planting to provide feedstock for ethanol.

Terra says the increase in sales was due to higher sales volumes and prices in the quarter. Compared with second-quarter 2006, volumes of ammonia, nitrogen solutions, and ammonium nitrate rose by 3%, 23%, and 21%, respectively. Prices for urea rose 7%, while prices were up 36% for nitrogen solutions and 13% for ammonium nitrate. Meanwhile, the cost of sales rose by 9% because of higher sales volumes and higher costs of North American natural gas.

Mosaic, which had a 93.5% earnings increase to $202.6 million as sales rose 26.5% to $1.68 billion, noted higher selling prices for phosphates and potash, as well as higher volumes for potash. The average potash selling price at the plant increased $5.00 per metric ton from the previous quarter to $146 per metric ton.

In terms of dollar growth, Mosaic led the pack with earnings rising by $97.9 million. Mosaic was followed by industrial gas producers Air Products & Chemicals and Praxair.

Earnings at Air Products were up $78.4 million to $284.9 million. Company Chief Executive Officer John P. Jones III says: "We again exceeded expectations with record performance this quarter. Sales were at their highest ever, as demand for our gases and materials across core manufacturing, energy, and electronics markets remained strong." He also notes that the company saw continued benefit from its strategic investments in growth businesses and regions.

Praxair's earnings rose by $44.0 million to $291.0 million. CEO Stephen F. Angel says, "The outlook for our products and technologies continues to brighten, particularly in the energy sector and emerging markets." Angel also notes that the company is continuing to refine production and delivery systems to improve quality for customers while generating productivity improvements that reduce both capital and operating costs.

Whereas Mosaic, Air Products, and Praxair were posting the largest dollar gains in earnings among the companies, PPG Industries had the largest dollar decline. The Pittsburgh-based firm's earnings dropped by $17.0 million to $255.0 million, despite having the largest sales total of any quarter in the company's history—$3.17 billion. Operating income increased at the company's coatings segments and its optical and specialty materials unit. These increases, however, were more than offset by declines in its commodity chemicals and its glass segments.

MEANWHILE, the two largest companies on the list were achieving only very modest percentage gains in earnings. At industry leader Dow Chemical, earnings were up just 1.6% to $1.04 billion on a 6.0% increase in sales to $13.3 billion. The company says that strong volume increases in Asia-Pacific, Latin America, and most operating segments in Europe offset continued weakness in North American housing and automotive sectors. CEO Andrew N. Liveris says, "Our global strength, diverse business portfolio, focus on price/volume management, and commitment to joint ventures combined to overcome an unprecedented rise in feedstock and energy costs." These costs, according to the company, increased by $700 million from the first quarter of 2007 and by $550 million over the second quarter of last year.

As for the future, Liveris says: "We expect global GDP to remain healthy, as the U.S. economy stabilizes and growth around the world continues to be strong. We anticipate solid demand through the third quarter, although agricultural sciences is likely to see a typical seasonal decline." Liveris also anticipates that feedstock and energy costs will remain high and volatile through the quarter.

DuPont's earnings were up 3.0% from the year-earlier quarter to $972.0 million. Sales increased 5.8% to $7.88 billion. Charles O. Holliday Jr., the company's CEO, says, "We generated solid volume growth in all regions outside the U.S. and increased local selling prices for the 14th consecutive quarter, while reducing fixed costs as a percentage of sales." DuPont says that a 4% volume growth outside the U.S. was partially offset by lower volumes, primarily in the U.S., from slower housing and auto markets.

For the remainder of the year, DuPont expects to benefit from continued growth outside the U.S., higher local selling prices, and ongoing fixed-cost productivity gains. The firm also anticipates continued softness in the U.S. housing market, higher ingredient costs, and a higher base tax rate than last year.

Other chemical companies seem optimistic about the balance of the year. At Cytec, CEO David Lilley says: "Our expectations going forward are for the specialty chemical segments to have good growth in all parts of the world except North America, where we are forecasting demand to be weak. We expect to continue to have selling prices cover higher raw material costs, although we must be vigilant with oil prices increasing and natural gas costs still volatile. In building-block chemicals, we expect the markets for acrylonitrile and melamine to remain tight and thus retain our ability to pass through higher raw material costs." Finally, he says, increasing build rates in the large commercial aircraft, rotorcraft, and business jet sectors, plus new composite applications on new aerospace platforms provide an excellent growth opportunity for engineered materials, both in the near and long term.

Raj L.Gupta, CEO of Rohm and Haas, says: "In looking at the full-year 2007, demand is tracking as we had anticipated, with modest growth in the electronics market, accelerating toward the second half of the year, and robust growth in the emerging markets. The weak U.S. building and construction markets remain a challenge for our specialty materials businesses, as does the volatile raw materials outlook." Gupta is optimistic, however. "We are navigating these external challenges through proactive cost management, as well as implementing pricing initiatives to cover higher raw material increases."

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