Issue Date: November 16, 2009
Some Good News In Third Quarter
The third quarter of the year was painful for the 23 U.S. chemical companies that C&EN tracks. They saw earnings fall by a combined 42.6% on sales that contracted 24.7% versus the year-ago quarter. Compared with the second quarter, however, the results suggest that the industry-wide effort to cut costs while trimming production has been successful. As a result, profit margins increased from an average of 5.5% in the second quarter to 5.8% in the third.
The quarter marks a full year since the effects of the recession first appeared in chemical industry earnings reports. A year ago, the signs of trouble were limited to the U.S. housing and auto markets and were more than offset by sales in emerging markets. Now, after four quarters of unprecedented global declines, this round of earnings reports shows that chemical companies are on firmer ground.
At Dow Chemical, the recessionary challenges were compounded by the company’s effort to pay for the purchase of Rohm and Haas and integrate its operations. Third-quarter earnings were down 36.9% compared with last year’s. But the picture is significantly improved from the second quarter: Dow’s third-quarter sales of $12.0 billion are 6% higher than the second quarter’s, and third-quarter earnings of $357 million are more than double the second quarter’s.
In a report to investors, Andrew N. Liveris, Dow’s chief executive officer, credited the sequential turnaround to increased prices and cost reductions totaling $1 billion. In a further sign of progress, Liveris said, the company saw an uptick in sales volumes in emerging economies. “We are seeing pockets of volume growth in certain businesses versus the prior quarter, primarily in advanced materials, performance products, and performance systems, which have benefited from the beginnings of a global economic recovery,” he said.
Dow’s acquisition of Rohm and Haas means it now has businesses that are well positioned to benefit early from an upturn, according to Citigroup chemical stock analyst P. J. Juvekar. In a note to investors, he pointed out that performance products—which includes polyurethanes, amines, and epoxies—was one of Dow’s strongest segments, posting a sales increase of 16% from the second quarter. “Government stimulus played a large role in the improvement, particularly for autos and construction, which collectively account for about 20% of segment sales,” Juvekar also noted.
Several other firms in the C&EN survey reported that they have seen demand increase since the second quarter, including Albemarle, Air Products & Chemicals, Celanese, DuPont, FMC, H.B. Fuller, Lubrizol, and Praxair. The two industrial gas firms saw the largest improvement: Air Products reported a 7.7% jump in quarter-over-quarter sales, and Praxair had 7.0% growth. “The strongest pickup was in Asia and South America, where government stimulus programs have increased domestic demand and industrial production,” Praxair CEO Stephen F. Angel told investors.
At Celanese, sales increased a more modest 4.8% from the second quarter. CEO David N. Weidman reassured investors that “our third-quarter results reflect stabilization in demand across our major geographies and end-use applications, with modest recovery in select areas.” He added, “Continued strength in Asia and the benefits of government-sponsored programs in the North American automotive and related industries also contributed positively to our results.”
Results at Lubrizol show the company has become more competitive over the past two quarters compared with other firms on the C&EN list. With third-quarter earnings of $174 million, Lubrizol ranked fifth in earnings overall and third in profit margin. At last year’s third-quarter mark, Lubrizol did not appear in any of C&EN’s top 10 lists. The company reported that it benefited from cost-savings initiatives and strong results in its additives and advanced materials businesses.
At Albemarle, meanwhile, a 25% jump in fine chemicals sales over the prior quarter paced improvement company-wide. “Volumes continue to improve for many of our products, and we are encouraged by the sequential increase in sales and profitability over the prior two quarters,” wrote CEO Mark C. Rohr in an earnings release. He expressed growing optimism about the economy: “Our order patterns thus far in the fourth quarter alleviate some of the concern we previously expressed about the sustainability of the recovery going forward.”
In contrast, businesses serving agriculture that boomed during the early days of the recession have busted during the past six months. Terra Industries and Mosaic, two pure-play fertilizer companies tracked by C&EN, saw sales and earnings plunge compared with last year’s quarter. In a research report, fertilizer analyst Charles Neivert of equity research firm Dahlman Rose noted that good growing weather has put downward pressure on grain prices. He added, “At the same time, demand in key grain end markets is declining.” One important end market for grain is livestock, but demand has faltered because farmers are getting lower prices for beef and milk.
Meanwhile, Citigroup’s Juvekar said agriculture businesses at Dow and DuPont posted results below expectations owing to “deteriorating farm economics, lower crop chemical applications, and reduced corn plantings in Latin America.” He predicted that Dow would see improvement next year when it introduces SmartStax, a multitrait, genetically modified corn seed.
In total, companies tracked by C&EN saw sales increase 2.4% from the second quarter. The increase is slightly smaller than the 3.5% growth rate—the first upturn in a while—posted by the overall U.S. economy during the quarter, according to an early estimate from the Bureau of Economic Analysis. The economic growth was a boon to chemical firms because almost half of it was due to motor vehicle output spurred by the Cash for Clunkers program.
Performance materials and coatings firms also benefited from an increase in housing construction. According to the U.S. Census Bureau, housing starts inched up by 0.5% in September compared with August, though they are still down 28.2% from last year. Moreover, it is not clear how stable the small recovery is. The National Association of Homebuilders contends that demand for houses is strongly tied to the home-buyer tax credit. In early November, President Barack Obama signed legislation that expanded the time limit and eligibility requirements for the credit.
Consumer-driven demand remains weak, as concerns about unemployment continue to impact household finances. The Conference Board consumer confidence index dropped from 54.1 in August to 53.4 in September. The October number is lower still, at 47.7, suggesting that spending in the fourth-quarter holiday season may be disappointing.
In the near term, chemical companies will benefit from low inventories at their industrial customers’ sites. In a research note, Jefferies & Co. chemical analyst Laurence Alexander told investors that after a period of destocking, manufacturers are running low on inventory, which should encourage increased chemical production. However, he warned, the pace of expansion may slow before demand rebounds.
Smaller, more specialized chemical firms are already ramping up production in response to increasing demand, says Joseph G. Acker, president of the Society of Chemical Manufacturers & Affiliates (SOCMA), a trade association for custom chemical makers.
“Privately held firms have a lot more flexibility; if something new comes along, they can jump into it if they have capacity. I know of at least half-a-dozen companies that are putting in equipment to expand their facilities,” Acker reports. He lists Cambridge Major Laboratories, an outsourcing partner to pharmaceutical companies, and Equinox Chemicals, a custom organic synthesis research and manufacturing company, as two that are expanding.
Most of SOCMA’s members are privately held and do not release earnings data. But Acker says a survey of member companies suggests that third-quarter earnings at most firms were down about 10–15% from a year ago, but they are better than they were early in the year when companies saw profits dip by 20–30%.
Going forward, Acker says, company executives “seem to feel that the recovery has begun. They are proceeding with cautious optimism because they are still concerned that many issues have not been resolved in the general economic environment.” On that score, they have much in common with the big guys. Dow’s Liveris predicts a slow and tenuous recovery and says the firm’s 2009–10 operating plans “do not count on material improvements in market conditions.”
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