Chemical Firms Defy Economic Woes

SIGNS OF A RECESSION are hard to find by looking at the fourth-quarter and full-year 2007 earnings of major U.S. chemical companies. These firms performed well despite rising energy costs and the U.S. housing slump. Chemical chief executive officers are giving themselves credit for emphasizing growth overseas so foreign earnings could make up for weakness at home.

During the fourth quarter, combined sales at 22 firms surveyed by C&EN climbed 15.3% versus the year-ago period, hitting $45.7 billion. Earnings showed an even stronger jump, 19.0%, to nearly $3.5 billion. Thus, profitability for the group increased to 7.6% from 7.4% in fourth-quarter 2006.

Gains for the entire year are more modest. Sales at the 22 firms increased 9.9% to $176 billion versus 2006, while earnings rose 12.9% to $14.7 billion. Profitability was 8.3% versus 8.1% in 2006.

Chemical executives have been concerned about how their industry would react to the troubled U.S. economy, which may be on the brink of a recession. For instance, one of the industry's largest markets, construction, has been in free fall. According to the Census Bureau, privately owned housing starts declined by 24.8% during 2007 versus 2006.

In addition, before chemical companies came out with their fourth-quarter results, Citigroup stock analyst P. J. Juvekar worried about the effects of high oil prices. "Despite aggressive moves by commodity players to push prices higher in the fourth quarter, we expect margins to decline on record energy costs," he said. Juvekar was also wary that specialty chemicals makers could have difficulty raising prices.

Now that the industry's results are out, Kevin W. McCarthy, a chemical stock analyst with Bank of America, is impressed with them. For one thing, they largely beat Wall Street estimates. In a report to clients, McCarthy wrote that seven of the companies he tracks reported a combined North American sales volume increase of 1.9%, modest compared with Asia, Europe, and Latin America but still the biggest increase in North America in more than two years. "A weak U.S. dollar is clearly helping trade balances—and foreign-exchange translation," he said, adding that chemical company customers probably also bought heavily in anticipation of rising prices.

The largest U.S. chemical company, Dow Chemical, posted a 16.3% increase in fourth-quarter sales to $14.2 billion, while earnings fell by 15.5% to $806 million. Although Dow's production volumes rose by 2.0% versus the year-ago quarter and prices increased by 7.0%, feedstock and energy costs jumped by 11%, a $1.7 billion increase.

Revealing U.S. weakness, Dow's volumes in North America slid by 2.0%, whereas they grew in Asia and Latin America by 8.0% and 7.0%, respectively. "We're seeing almost all the weakness limited to the U.S.," Dow Chief Executive Officer Andrew N. Liveris told analysts when the company released its results. "I'd remind you that our company has great geographic diversity, with two-thirds of our sales outside the U.S. and growing. While a continued storm in the U.S. is definitely not a positive, we are well-positioned to weather that storm."

Citigroup's Juvekar said Dow's quarter was better than he expected, given the economy. "Dow delivered a good quarter in an increasingly difficult macroenvironment," he wrote in a report.

DuPont ended the year with strong results. For the quarter, revenues increased 11.3% to nearly $7.0 billion versus the September-through-December quarter in 2006, while earnings climbed 23.7% to $522 million. For the year, sales increased 7.1% to $29.4 billion and earnings increased a more modest 13.3% to $3.0 billion.

CEO Charles O. Holliday Jr. is also patting himself on the back for executing an overseas-centric strategy. "We grew earnings because we were successful in growing revenue outside the U.S. and because we were successful at reducing costs," he told analysts.

Analysts, in turn, acknowledge that the company's strategy has helped. "DuPont has now come to follow the standard formula for success in the chemical markets," Jeffrey J. Zekauskas, a chemical analyst at J. P. Morgan, said about DuPont's results. According to Zekauskas, that formula includes expanding in emerging markets in Asia and Eastern Europe and raising prices ahead of climbing raw material costs.

Likewise, PPG Industries CEO Charles E. Bunch attributed his company's success, a 15.0% increase in sales and a 26.8% spike in earnings for the quarter, to expansions and acquisitions overseas. "Our past actions have us poised for continued success in 2008 despite economic challenges as the year begins," he said in PPG's earnings announcement.

Lubrizol reported a 16.4% increase in sales and a 21.1% increase in earnings for the quarter. For the year, sales increased 11.3% to $4.5 billion and earnings jumped 33.4% to $284 million. Revenues for Lubrizol's lubricant additives segment rose 21% in the quarter on stronger volumes plus price increases and beneficial currency exchange rates.

Hercules CEO Craig A. Rogerson is happy with his company's results. For the year, its sales increased 5.0%, hitting $2.1 billion, while earnings rose 23.7% to $170 million. For the quarter, sales increased by 9.5% and earnings increased a more modest 0.6%. He says paper chemicals performed well, even in North America. "We did see softness in our construction business in the U.S., as you would expect with the housing downturn," Rogerson told C&EN. "The business in what we would call the fast-growth and emerging markets made up for slowness in the U.S."

H.B. Fuller saw huge increases in profits—40.6% in the quarter and 39.1% for the year—despite a decline in sales for the quarter and only a marginal increase for the year. CEO Michele Volpi told analysts that a 3% reduction in selling and administrative expenses during the year "enabled us to deliver strong financial performance in light of the economic challenges we have faced."

BUT SOME companies did show signs of weakness either in their quarterly or annual results. During the quarter, Rohm and Haas's sales increased by 15.6% while earnings rose 0.6%. For the year, its sales increased 8.1% but earnings declined 6.6%. The company blamed sagging U.S. building and construction markets, high raw material costs, and production difficulties.

Still, Rohm and Haas CEO Raj L. Gupta says he's pleased with fourth-quarter performance. "We completed the year on a strong note with record sales contributed by robust organic growth, particularly in our electronic materials business," he said. The company also posted strong performance in its salt business and in emerging economies.

Eastman Chemical's sales and earnings rose 9.0% and 6.2%, respectively, in the quarter. Full-year sales, however, increased less than 1% and earnings fell 2.5%. The company, which has been restructuring its polymers business, also noted lower sales volumes for coatings-related products in North America and difficulty in recouping all of its raw material price increases.

Albemarle's earnings declined by 7.0% during the fourth quarter on a 2.5% increase in sales. Its full-year results were stronger: a 15.6% increase in earnings on a 1.4% decrease in sales. The company saw revenues in its fine chemicals segment decline by 20.0% in the fourth quarter versus the year-ago period, when the company had strong volumes from Tamiflu intermediates. Sales increased by only 2.0% during the fourth quarter in its polymer additives segment. However, revenues for its catalyst segment rose by 22%. "Bottom line, all the upside came from one segment, catalysts," Citigroup's Juvekar told clients.

Cabot saw the biggest earnings drop among the firms surveyed: 48.2% for the quarter and 24.4% for the year. The company says it failed to raise prices sufficiently to cover increasing raw material costs.

Due in part to the biofuels boom, fertilizer producers have suddenly become some of the most profitable chemical makers. Among the 22 chemical companies C&EN surveyed, Terra Industries posted the strongest gains for the quarter—a 501% increase in earnings, to $69.7 million, on a 26.9% increase in sales to $570 million. For the year, earnings rose 5,893%, a surprising number that is the product of a huge jump in earnings to $252 million in 2007 from only $4.2 million in 2006. High prices for agricultural commodities are pushing fertilizer prices upward. Terra says prices for ammonia, nitrogen solutions, and ammonium nitrate increased 16%, 69%, and 20%, respectively, in the fourth quarter versus the year-ago period.

Mosaic, which primarily makes potassium and phosphorus fertilizers, also saw an astronomical increase in profits. Its earnings for the quarter skyrocketed nearly 500% and its sales increased 44.2%. Full-year profits rose 354% while sales climbed a strong 37.3%.

The company says quarter-over-quarter diammonium phosphate prices jumped 71.6%, and potash prices increased by 20.4%. "The market environment remains extraordinary," says CEO James T. Prokopanko. "Agricultural commodity prices continue to increase to unprecedented levels, resulting in robust farm economics and nutrient-demand prospects."

Industrial gas companies performed well in 2007. Air Products & Chemicals reported a sales increase of 9.1% to $2.5 billion during the quarter, while earnings rose by 16.3% to $257 million.

Praxair's sales increased 18.8% to $2.5 billion during the quarter as earnings rose 17.5%. For the year, Praxair experienced a 13.0% increase in sales to $9.4 billion and a 19.1% jump in earnings to $1.2 billion. The company experienced strong growth in all regions, even posting a 10% annual increase in North American sales.

In addition, high energy prices, which work against most chemical companies, favor gas suppliers because oxygen and hydrogen are used both in oil refining and in energy-saving industrial processes. "High oil and gas prices and environmental regulations, combined with strong demand from emerging markets, will continue to fuel growth," Praxair Chief Financial Officer James S. Sawyer told analysts.

MOST CHEMICAL COMPANIES expect the challenges of 2008 to be similar to the ones they experienced at the end of 2007. "The two most significant headwinds we will face during the year are the uncertain prospects for the U.S. and global economies and the volatility of raw material and energy costs," Eastman CEO J. Brian Ferguson says.

And companies are keeping with the strategy that has worked thus far: Raise prices to offset high raw material costs and focus on foreign operations to make up for weakness at home. "We are anticipating further deterioration in the U.S. building and construction markets, for which we are prepared," says Rohm and Haas's Gupta. "Last year, we successfully implemented selling-price increases in the fourth quarter to help offset the rising costs of raw materials, energy, and freight. Going forward, we intend to implement further actions to recover these costs."

Hercules' Rogerson expects another good year in 2008 "unless there is a drastic expansion of the slowdown in the U.S.," he says. "We don't see any signs of that yet."

Every CEO will say that his or her firm is poised to weather the economic storm. Rogerson says that is actually a fair assessment of the chemical industry as a whole, which he says learned its lessons from past lean times. "Diversification and productivity initiatives have really been in place since the last downturn in 2000 and 2001," he says. "There hasn't been excess capacity or a lot of hiring. The discipline that's been applied across the industry since the last downturn will keep us in pretty good stead during this potential next one."