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Earnings Growth Stalls

Second Quarter: Deteriorating chemical demand blamed on weaker-than-expected economy

by Melody M. Bomgardner
July 30, 2012 | A version of this story appeared in Volume 90, Issue 31

Many firms had difficulty boosting earnings in midst of weak economy.
Table shows second-quarter chemical results, with many companies having difficulty boosting earnings.
Many firms had difficulty boosting earnings in midst of weak economy.

Chemical executives entered the second quarter with expectations of growing demand, but they now face the opposite scenario. Economic weakness in developed economies worsened during the quarter, and growth slowed in emerging markets. For the first time since the end of the Great Recession, chemical firms reported notable decreases in both sales volumes and prices, causing earnings growth to be flat or negative.

The news was particularly grim at Dow Chemical. In a conference call with analysts, CEO Andrew N. Liveris said he had been expecting demand to continue growing in the second quarter, followed by further improvements in the latter half of the year. “However, we saw an accelerated slowdown in the global economy that weighed down heavily on most sectors and geographies,” Liveris said. The CEO presented a matrix of Dow businesses and regions—called a heat map—showing that outlook downgrades outweighed upgrades by a ratio of 10 to 1 in the second quarter.

Overall, Dow’s sales dropped 9.6%, and earnings shrank 34.4% to $649 million compared with the year-ago quarter. Some segments performed well, including agriculture, performance plastics, and materials for organic light-emitting-diode displays. Volumes of products sold in Asia increased by about 2%. Otherwise, sales and earnings in all sectors and regions declined. Dow also took a significant hit in its pricing power; prices dropped in all segments except agriculture.

At DuPont, earnings were rescued by nontraditional businesses, particularly those that came from last year’s acquisition of the Danish food ingredient maker Danisco. The firm increased sales and earnings by some 7% each.

“The newly created reporting segments of nutrition and health and industrial biosciences delivered strong performance this quarter and are expected to combine for over $4.5 billion in sales this year,” CEO Ellen J. Kullman told investors on a conference call. The two new segments more than made up for demand weakness in electronics and performance chemicals.

Analysts who follow the industry had lowered their outlook for the quarter as they watched economic indicators erode in recent months. Most chemical companies are reporting results in-line with the reduced expectations, according to Laurence Alexander, a stock analyst at Jefferies & Co. “We expect outlooks to be more cautious due to the lack of visibility near term and concerns about the resilience of the U.S. consumer, [European Union] budget pressures, and emerging market deceleration,” he told investors.



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