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A Mixed Third Quarter

Chemical makers struggle with high costs and hurricanes

by Melody Voith
November 3, 2008 | APPEARED IN VOLUME 86, ISSUE 44

Credit: Dow Chemical
Credit: Dow Chemical

HURRICANES took the wind out of third-quarter profits for many chemical companies. But even more daunting is a looming recession and its likely effects on earnings for the rest of this year and next.

Companies affected by September's Gulf Coast hurricanes handled storm effects differently in their quarterly financial results, which complicated the mixed earnings picture. While DuPont took a charge of $146 million on earnings and Dow Chemical excluded $81 million, Celanese included $15 million of costs related to Hurricane Ike in its adjusted earnings.

Even without the hurricane impact, Dow reported earnings 31.1% lower than the same period one year ago. Net sales increased 13.4%, but the company saw feedstock and energy costs surge 48% to $2.6 billion, the largest year-over-year increase in its history. Although the company implemented price increases totaling 22%, the higher prices and weak demand lowered sales volumes by 5%.

Last quarter, Dow's geographic diversity —70% of its sales come from outside the U.S.—offset lower domestic demand. But in a report to investors, Dow Chief Executive Officer Andrew N. Liveris warned that weakness is spreading to the rest of the world. "In our view, we will likely see a global recession through most of 2009," he writes.

Specialty chemical makers such as Albemarle and Rohm and Haas also struggled with unexpected high costs. "What's rescuing them from lack of volume growth is pricing, but clearly, most are behind the curve. They try to predict the future by looking at last quarter," says Dmitry Silversteyn, senior research analyst for specialty chemicals at the investment firm Longbow Research.

Despite the pressure, there were spots of good news. The agriculture sector continued to benefit from strong pricing power due to high commodity prices. Fertilizer makers Mosaic and Terra Industries both had profit margins above 20% for the quarter.

In specialty chemicals, FMC Corp. and Nalco bucked the industry trend of decreasing margins. William G. Walter, CEO of FMC, attributed his company's 62.3% increase in earnings to strong demand for agricultural products in Brazil and increased sales of biopolymer and lithium specialties.

Nalco saw sales increase in all regions, led by a 28.2% jump in Latin America. Overall, earnings at the company were up 54.1%. Nalco CEO J. Erik Fyrwald attributed the increase to high demand "in the many areas where we help customers to drive energy, water, maintenance, and other savings."

Industrial gas suppliers Praxair and Air Products & Chemicals continued their solid sales and earnings growth, although margins tightened. In a report to investors, Praxair CEO Stephen F. Angel echoes Liveris, predicting tough times ahead. "We expect to see a contraction in manufacturing output in the U.S. and Europe, combined with slowing growth in Asia and South America for the next several quarters," he writes.



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