Chemical Earnings Resist Slowdown

In the third quarter, the U.S. chemical industry was able to wring strong profits from its position in the manufacturing supply chain, even as signs of a growth slowdown became more evident. The 22 firms tracked by C&EN delivered earnings that were 38.8% higher than in the 2010 third quarter. The increase was due mainly to higher prices, which outpaced raw material and energy costs and widened profit margins to 8.4% from 7.3% in the year-ago quarter.

Companies raised prices significantly, even in business units where volumes were shrinking. At Dow Chemical, the largest U.S. chemical maker, demand for performance materials eroded by 3%, but prices shot up by 15%, resulting in a 12% increase in earnings for the segment. The company also saw volume declines in its coatings, performance materials, and feedstocks and energy segments; demand for performance plastics and electronic materials increased slightly. Overall, Dow raised prices by 17%, and in parallel, earnings increased 17.6% to $729 million compared with last year’s third quarter.

Chief Executive Officer Andrew N. Liveris explained that sales in the quarter were driven by strong business in emerging economies. “The large, fast-growing countries of China, India, and Brazil all delivered impressive double-digit volume growth. And once again this quarter, we delivered record sales in China,” he told analysts in a conference call. “This really enabled us to offset soft demand in the U.S. and Europe.”

During the call, Liveris repeatedly assured analysts that, with recent restructuring, the firm is well prepared to handle economic uncertainty. “We have additional levers that we can pull if the microeconomic factors begin to mirror the macros, as we began to see in the third quarter,” he said.

The only business segment to see significant sales growth at Dow was agriculture, where revenues grew 27%, 18% of which came from higher volumes. Earnings in the segment, up 6%, were higher than analysts expected and were “driven by robust agricultural commodity prices and improved demand for Dow’s seed business, especially in Latin America,” according to John P. McNulty, a chemicals stock analyst at Credit Suisse.

Meanwhile, at DuPont, growth in demand for agricultural products helped offset destocking in photovoltaics and specialty polymers. Agriculture sales rose 41% compared with the 2010 third quarter, on 26% higher volumes. However, sales volumes sank by 7% in performance materials and by 8% in electronic chemicals.

For the quarter, DuPont was able to raise prices by 15% on average. The boost helped the firm report a jump in earnings of 78.5% to $655 million compared with the year-ago quarter, although on average, volume increased only 1%. One highlight was that DuPont’s sales in developing markets were up 38%. DuPont CEO Ellen J. Kullman attributed the overall positive results to the company’s “resilience and diversity.” She said its portfolio has been strengthened by capacity expansions and the addition of food ingredients and enzymes from the integration of Danisco, which DuPont acquired in May.

The themes outlined in the earnings reports of the two U.S. chemical giants were echoed at smaller, less diversified firms. For example, companies that sell agricultural products did a good business in Latin America in the third quarter. At FMC Corp., sales of agricultural pesticides were up 24%, led by growth in Brazil for crops such as sugarcane, cotton, and soybeans.

At fertilizer firm CF Industries, a strong quarter for agriculture meant a 589.6% increase in earnings over last year’s third quarter. Volume barely increased by 3%, however. Instead, the driver was price. “Contrary to normal seasonal patterns,” CF reported, “crop nutrient prices remained firm through the summer months because of constrained global supply and strong restocking demand in the Northern Hemisphere. Average realized prices for each of the company’s major products increased by 33% or more compared with the third quarter of 2010.”

Like DuPont, Ferro faced problems with the photovoltaic market. Its sales of solar conductive pastes dropped 50% compared with the prior-year quarter because of “low end-market demand and excess inventory of completed solar power modules, particularly in the European solar market.” Overall, the sudden drop in demand resulted in a 20.0% earnings decline for the company compared with last year’s third quarter.

Eastman Chemical mirrored Dow in reporting that its plastics business did not enjoy volume strength during the quarter. Eastman reported lower sales volumes, which it attributed to weakened demand for copolyester products in packaging, consumer durable goods, and liquid-crystal display products, as well as customer inventory destocking. The firm said some customers were shifting to cheaper plastics that do not use p-xylene as a raw material. Still, revenues for plastics at Eastman were up 4% because of higher prices, and overall, the company raised earnings by 4.9% over last year.

As at Dow, coatings were a weak spot for PPG Industries and Cytec Industries. Cytec saw volumes for its coating resins drop 10% compared with third-quarter 2010 because of weak demand and inventory control measures adopted by customers in North America and Europe. Cytec CEO Shane D. Fleming does not anticipate strengthening demand this year. “Although automotive end-market demand is expected to stay intact, a slowdown in demand in other industrial markets is expected to continue, in addition to the seasonally weaker fourth quarter,” Fleming told analysts. He added that the firm is considering the sale or restructuring of its coatings resins business.

At PPG Industries, performance coatings sales volumes were flat, and architectural coatings volumes declined 2%. But higher prices and demand for industrial coatings from emerging regions helped the firm boost earnings by 18.7% to $311 million.

Aside from agriculture, growth markets for chemical makers included water treatment and industrial gases. At Nalco, sales in the water services business grew 11%, led by mining, food, and beverage markets. The company is in the process of being acquired by environmental services firm Ecolab.

Industrial gas companies Air Products & Chemicals and Praxair both reported that demand was strong, especially from customers in Asia. Sales in Air Products’ electronics segment were up 30% compared with the prior-year quarter, mainly because of higher volumes.

Looking ahead, chemical industry executives signaled that business would take a time-out in the fourth quarter because of the normal seasonal slowdown as well as anticipated customer destocking. They did not tell investors about any plans to back off on price increases, but analysts say prices for some products will likely come down. “Margins in the fourth quarter could face severe pressure, particularly in petrochemicals and midstream chemicals with looser supply/demand balances,” warned Laurence Alexander, a chemicals analyst at Jefferies & Co.

But even a weak fourth quarter would not take away from the success the chemical industry has had in 2011. The biggest postrecession bump happened more than a year ago, in the first two quarters of 2010, but U.S. companies have continued to increase earnings by at least 30% each quarter since then, primarily as a result of the strength of emerging markets such as Asia and Latin America. Clearly, earnings aren’t driven by domestic demand. On Nov. 3, the Federal Reserve Board lowered its 2011 projection for U.S. gross domestic product growth to a range of 1.6–1.7% from its June projection of 2.7–2.9%. The Fed is now projecting 2012 GDP growth of 2.5–2.9%.

Chemical executives sounded a bit more optimistic than the Fed did about 2012, although they were short on their reasons why. In his conference call, Liveris vowed that Dow would make more strides to pay down debt in 2012 and introduce four new agricultural products during the year.

DuPont’s Kullman told analysts that she expects raw material prices to moderate in 2012 and photovoltaics manufacturing to rebound early in the year. Even the North American market will be stronger in 2012, she promised. “DuPont sales volumes were flattish this quarter, which we view as a pause, with gradual recovery likely to resume in 2012.”