Issue Date: May 16, 2011
Price Hikes Lift Chemical Profits
In contrast to the tame growth of the overall U.S. economy in the first quarter, chemical companies enjoyed an uplifting three months. For 23 firms tracked by C&EN, sales rose 14.6% and earnings jumped 47.0% compared with the first quarter of 2010.
For the chemical industry at least, the recession is now mostly a distant memory. Firms reported that production volumes were up across all business segments and in all regions. The only remaining soft spot in demand was for construction-related materials in the developed economies.
The quarter saw reports of tight supplies for some must-have chemicals, including resins, coatings, titanium dioxide, and potash fertilizer. Along with strong demand from the manufacturing and agriculture sectors, low availability encouraged many chemical firms to raise prices steeply, more than offsetting a corresponding increase in raw material prices.
The pricing power of the chemical industry is reflected in the expanded profit margins reported by the 23 firms C&EN tracks. On average, the companies posted profit margins of 9.9%, up from 7.7% in the first quarter of 2010. That result beats the previous high-water mark of 9.0% in the prerecession first quarter of 2008.
For the first quarter, Dow Chemical reported a profit margin of 6.5%, compared with 4.3% in last year’s first quarter, on sales of $14.7 billion. Dow’s chief executive officer, Andrew N. Liveris, highlighted the firm’s roomier margin in his remarks during a conference call with analysts. “Once again, we delivered significant margin expansion, with coatings and infrastructure and performance products in particular achieving significant margin gains,” he said.
The profits were driven by 16% higher prices in Dow’s performance products business and 12% higher prices on average across all of the firm’s businesses. P. J. Juvekar, chemicals stock analyst for Citigroup, praised the company’s strong operational performance. “Dow did a great job in managing rising raw material costs, as 12% higher pricing more than offset a $700 million increase in feedstock and energy costs,” he told clients.
Analysts also pointed out that Dow beat their consensus expectations in part by increasing earnings in its plastics and basic chemicals businesses, where the firm benefited from the combination of higher sales prices with the cost advantage of using natural gas as a feedstock.
Eastman Chemical saw a similar advantage in low-cost feedstocks, enjoying, like Dow, the big difference between propane and propylene prices. Eastman earned $182 million in the first quarter, a 73.3% leap from the same quarter last year. In its performance chemicals and intermediates business, the company reported a sales increase of 44% due to both higher volumes and selling prices. Eastman was able to meet higher demand by restarting a previously idled ethylene cracker at its Longview, Texas, facility. It also expanded its plasticizer product line with the acquisition of Genovique Specialties.
But higher or unpredictable feedstock costs could still be a problem for the firm in 2011, CEO Jim Rogers acknowledged in his report to investors. “Key variables include whether inflationary pressures negatively impact global demand and the volatility of raw material and energy costs, particularly the spread between prices for propane and propylene,” he explained.
At DuPont, CEO Ellen J. Kullman told analysts on a conference call that her firm will continue to rely on its performance and agriculture businesses to increase profits but that it will not invest in upstream feedstock operations, as rival Dow plans to do. Instead, the company attracted notice from analysts by hiking prices in response to tight TiO2 supplies. And company executives pointed out that fluorine-based refrigerants and polymers were flying off the shelves.
DuPont’s strong first quarter prompted it to push up its 2011 earnings outlook to a range of $3.65 to $3.85 per share from its previous range of $3.45 to $3.75. Kullman declined to say what she anticipated the firm would spend as a result of higher raw material costs over the year.
For now, higher prices and strong demand for TiO2 have also boosted results at Huntsman Corp., which saw earnings rebound to $112 million from a $25 million loss in the first quarter of 2010. But higher feedstock costs could stalk the firm as the year progresses, suggested Laurence Alexander, chemicals analyst at Jefferies & Co. The firm buys 240 million lb of propylene per year and 1.6 billion gal of benzene per year, he pointed out to clients.
Tight fertilizer supplies boosted earnings at Mosaic, which made $542 million on sales of $2.2 billion, almost doubling its quarterly profit margin compared with last year. “The company is running its plants at high utilization rates to keep pace with demand, and potash inventories remain at historically low levels,” the firm reported.
In contrast, at Nalco higher costs put a squeeze on what had been an upward swing in profits. In the fourth quarter of 2010, the water treatment firm recorded $58 million in earnings for a profit margin of 5.2%. In the first quarter of 2011, sales were essentially flat from the previous quarter, but earnings shrank to $33 million. “Each of our business units must keep driving price capture of raw material cost inflation and company-wide productivity efforts to restore margins,” CEO Erik Fyrwald said.
Celanese not only stayed ahead of raw material costs but also raised its earnings outlook for the rest of the year to $4.22 per share, up 85 cents from its 2010 performance. The Dallas-based company based its prediction on higher volumes, particularly for cellulose acetate products, as well as continued strong global demand for acetic acid and downstream chemicals.
Aside from Celanese and DuPont, other companies avoided detailed earnings forecasts for the remainder of 2011. Yet figures from the U.S. Energy Information Administration make clear that high petroleum prices will not let up in 2011 or 2012. Crude oil was $103 per barrel in March, rising to $112 in April. The year’s average price is expected to be $106 per bbl, rising to $114 in 2012.
These higher prices affect consumers’ willingness to purchase goods. In the first quarter, the U.S. gross domestic product grew only 1.8%, less than most economists had expected. The Conference Board, which tracks economic indicators, said consumer spending was crimped by inclement winter weather and higher food and energy prices.
Business investments also slowed, the Conference Board noted, although only temporarily. “Looking ahead, we anticipate that capital spending will rise, and a modest gain in personal income should lift economic growth for the remainder of the year, though it is likely to stay below 3%.”
Chemical firms that sell to the auto industry in the U.S. and in Japan may find business slowing this year because of parts shortages following the earthquake and tsunami in Japan. Market research firm J.D. Power & Associates decreased its second-quarter estimates for North American auto production by 200,000 units from its previous forecast of 3.3 million vehicles.
But overall, the U.S. manufacturing sector is expanding, and that is good news for the chemical industry. According to the Institute for Supply Management, which tracks activity by purchasing managers, 17 of 18 manufacturing sectors reported an uptick in orders in April. “Inventory growth also took place in April after two months of destocking,” the group reported. “However, the inventory restocking would appear to be necessitated by the strong performance in new orders.”
An observation reported to the institute by a purchasing manager was telling of the chemical industry’s confidence at the moment: “Plastic resin product prices are climbing so fast that [suppliers] are attempting to increase prices on orders already accepted but not [yet] delivered.”
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