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Economy Heads For Downturn

by Alexander H. Tullo
December 24, 2012 | A version of this story appeared in Volume 90, Issue 52

With the European sovereign debt crisis in full swing, economists offered sour predictions for chemical industry performance as 2012 started. The American Chemistry Council (ACC), a chemical industry trade group, forecast U.S. chemical output to increase 1.6%; the group’s European counterpart, the European Chemical Industry Council, predicted a 1.5% rise.

The year indeed began slowly for chemical makers. During the first quarter, the 24 U.S. chemical firms tracked by C&EN saw sales increase by 6.4% and earnings decline by 8.4% versus the prior-year quarter. Executives opined about the need to cut spending. “With Europe in recession, we have taken actions to improve our business portfolio and cost positions,” Air Products & Chemicals’ chief executive officer, John E. McGlade, told analysts.

By June, economists at the European chemistry council backpedaled on their earlier predictions. They forecast no growth at all for the region’s chemical sector because of a worsening sovereign debt problem.

That same month, the American council launched its Chemical Activity Barometer, an index of chemical production and other industry data meant to be a leading indicator of the overall economy. The June numbers showed a decline, hinting at an economic downturn. A month later, ACC economists trimmed their outlook for U.S. chemical output growth to 0.5%.

Chemical company results continued to slip. Combined second-quarter sales for the firms tracked by C&EN declined by 1.1%, marking the first quarterly sales decline since the Great Recession of 2009. Earnings fell by 6.1%. Dow Chemical was hit particularly hard, reporting a 34.4% drop in profits. “The second quarter of 2012 was not Dow’s finest moment,” JP Morgan Chase stock analyst Jeffrey J. Zekauskas told clients.

European earnings also slumped. Although sales in the first half of 2012 increased for all eight of the European chemical firms tracked by C&EN, earnings for six of them fell, each by double-digit rates. Executives at these companies did sound some positive notes with their earnings announcements. The weakening euro, they pointed out, boosted foreign currency revenues. “Generally speaking,” noted Gilles Auffret, head of Solvay’s Rhodia unit, “except for Europe, things are going quite well.”

Facing sluggish demand, many chemical firms decided to cut jobs and capacity in 2012. European companies were the first out of the gate. DSM announced in August that it would let go 1,000 workers—4% of its staff—in a bid to save $185 million annually by 2014. Merck KGaA said in September that it would shed 1,100 workers, about 10% of its German staff, by the end of 2015, largely through attrition. Lonza said in October it would lay off 500 of its German workforce of 8,500.

Styrolution, a newly formed styrenic resins joint venture between Ineos and BASF, announced that it would close styrene and polystyrene plants in Marl, Germany, this year. Italian energy firm Eni announced that it would close money-losing petrochemical plants, including about 20% of its polyethylene capacity. It also changed the name of its chemical business from Poli­meri Europa to Versalis to signal a strategy of diversifying outside Europe.

And despite the slightly better U.S. economic climate, even bigger restructuring efforts were unveiled by U.S. firms toward the end of the year. In October, Dow Chemical said it would ax 2,400 jobs—5% of its total—and shutter 20 plants. The cuts, largely in Europe, are meant to save $500 million annually. “The new reality is that we are operating in a slow-growth and volatile world,” noted Dow CEO Andrew N. Liveris. DuPont disclosed in its third-quarter earnings announcement that it would cut 1,500 jobs.

Japanese companies also struggled. During the first half of the country’s fiscal year, seven out of nine Japanese chemical firms reported declines in sales. Of these, three reported losses. The country’s petrochemical sector, suffering from global overcapacity and high local costs, was hit hard. Mitsubishi Chemical said in June it would close an ethylene cracker and benzene plant at its massive Kashima complex in Japan.

Two chemical firms confident enough in the economy to contemplate initial public offerings aborted their missions. The larger of these was Evonik Industries, which in May said it was planning an IPO worth as much as $5.6 billion. It had considered IPOs twice before, only to have them dashed by economic woes. The third attempt suffered the same fate. In June, Evonik canceled the IPO, citing poor market conditions.

In September, Momentive Performance Materials withdrew its $860 million IPO. The specialty chemical maker refused to give reasons for cancellation, although it had been in hot water with credit ratings agencies over its high debt load.

In all, European chemical output contracted by 2.0% in 2012. ACC’s original prediction turned out to be accurate, and U.S. output rose by 1.5%.



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