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Europe's Industry Gathers Strength

Improved second quarter made for a good first half of 2008

by Patricia Short
August 11, 2008 | A version of this story appeared in Volume 86, Issue 32

FIRST-HALF SALES and earnings reports from leading European chemical companies held some negative signs but generally revealed an industry that is successfully combating economic headwinds.

First-quarter results for European chemical producers seemed to point to an industry ready to turn down. By the end of the second quarter, however, the picture had improved. European companies are following the lead of their U.S. competitors, which also performed well in the second quarter, with the notable exception of U.S. leader Dow Chemical (C&EN, July 28, page 15).

In fact, going into the second half, BASF Chairman Jürgen Hambrecht said demand for his company's products "remains strong, and the summer lull does not seem to be very pronounced."

Moreover, companies seem to be finding success in passing along their rising raw material costs to customers—and improving profitability in the process. This success is apparent in first-half profit margins, which improved from the first half of 2007 for nine of the 13 companies that have reported their results.

Credit: Arkema
Credit: Arkema

According to Arkema CEO Thierry LeHénaff, his company's strong earnings performance "illustrates the transformation undertaken within the group over the last three years." Indeed, the French company's improvement in net earnings compared with first-half 2007 led the pace for European companies reporting thus far. The firm's profit margin was up sharply, despite what LeHénaff called "a more challenging environment."

Currency effects continued to have an impact throughout the industry. The effects of a strong euro compared with the U.S. dollar were still being felt in the second quarter, although by the end of June the dollar had strengthened slightly.

It was the impact of currency, in fact, that Solvay blamed for its decline in first-half sales. "Demand for our main products remained good overall, but the unfavorable exchange rate weighed on the evolution in sales," the Belgian company stated.

Similarly, the report from Germany's Merck noted that first-half sales "grew organically by 13% but were reduced by 5.8% due to negative currency effects." Merck was able to improve its profit margins through lowered general and administration costs, which led to an increase in net earnings of nearly 16% over first-half 2007.

Credit: Clariant
Credit: Clariant

For the second quarter running, Clariant posted a decline in sales compared with the same period in 2007, although the Swiss company finally managed to improve earnings. "Clariant had a solid first half despite an increasingly difficult environment," CEO Jan Secher said. "We were able to compensate for an unprecedented 11% hike in raw material costs with price increases and to improve our operating margin."

Nearly all of the companies expect challenges in keeping up performance over the remainder of the year. As Secher put it, "We expect an even more difficult environment marked by an unbroken trend of raw material cost increases, a weakening macroeconomic environment, and unfavorable foreign exchange rates."

The appropriate response, LeHénaff said, is focus. In a comment that could apply to the rest of Europe's chemical makers, he said Arkema must "focus on increasing its prices, while continuing to implement self-help initiatives."


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