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Wary Customers Dampen Earnings

Fourth Quarter: Chemical firms blame inventory destocking for poor finish in 2011

by Melody M. Bomgardner
February 6, 2012 | A version of this story appeared in Volume 90, Issue 6

The European debt crisis and cash-conserving buyers added to seasonal slowness that hurt U.S. chemical earnings in the fourth quarter of 2011.

At Dow, earnings declined 46% compared with 2010’s fourth quarter. In a conference call, CEO Andrew N. Liveris reminded analysts that the company had anticipated destocking by customers and spent the fourth quarter cutting discretionary spending and tightening operating rates. The quarter brought lower sales volumes for electronic materials and coatings; performance materials volumes were flat.

Dow’s earnings were lower than expected, Charles Neivert, managing director at investment bank Dahlman Rose, wrote in a note to investors, but the shortfall was due to overall economic deterioration and outside the control of management. “This should not be a significant surprise to the market, as we have observed this from others in the chemical space,” he added.

At DuPont, sales volumes for electronic materials declined 33% compared with the year-ago quarter. CEO Ellen J. Kullman told analysts in a conference call that oversupply in photovoltaics continued to push down sales. She pointed out that the solar market is responsible for 40% of the company’s electronics sales. Sales of performance chemicals and performance coatings each declined 13%. In total, DuPont’s earnings dropped 30% year-over-year to $325 million.

On the positive side, Dow and DuPont both succeeded in raising prices enough to more than offset increasing raw material and energy costs and to push overall sales higher than in 2010’s fourth quarter. Emerging countries accounted for 35% of Dow’s sales; Liveris said strong volumes in these markets offset weakness in places such as Western Europe. In addition, good demand in Latin America helped Dow and DuPont each sell $1.3 billion worth of agricultural products in the quarter.

Meanwhile, a major acquisition made the difference at Ashland in the quarter. The integration of ISP contributed $450 million in sales and pushed earnings up 32% over fourth-quarter 2010. “The addition of ISP has significantly expanded our positions in higher-margin growth markets such as personal care and pharmaceuticals,” Ashland CEO James J. O’Brien told investors.

Chemical company CEOs share an outlook for 2012: They anticipate continued weakness in the first quarter but forecast a turnaround sometime thereafter. “At this point,” Kullman said, “many of our supply chain inventories are low, and we expect demand to pick up slowly, starting late in the first quarter or early in the second quarter.”

This table shows 2011 fourth-quarter earnings for chemical companies


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