A Positive Ending To A Tough Year

In the fourth quarter, the chemical industry reversed a three-quarter trend of declining earnings. The 23 firms tracked by C&EN posted an average increase in profits of 5.8% compared with the year-ago period. But sales for the three months didn’t grow, and results for the full year were down.

Within diversified chemical firms, a few businesses did quite well in the quarter, but many suffered from some combination of lower demand, higher feedstock costs, and weaker pricing. At most companies, executives relied on operational controls and restructuring to increase profit margins in the face of flat sales.

The strategies worked. Although 11 of the 23 firms posted sales declines, only six saw earnings fall. On average, sales increased a mere 0.3%, yet 12 firms boosted their profit margins during the quarter. For the full year, sales shrank 4.8% compared with 2011, but 17 companies increased profit margins.

At Dow Chemical, earnings jumped 26.7% compared with the year-ago quarter despite a 1.3% sales drop. In a conference call with analysts, Andrew N. Liveris, the firm’s chief executive officer, credited “stringent price, volume, and margin focus” for the company’s higher profit margins. Results were also enhanced by a $413 million decline in the cost of purchased feedstock and energy.

At the beginning of 2012, corporate executives were hopeful that the economy would pick up later in the year, but Liveris told analysts that the opposite happened. “The second half of 2012 saw significant deterioration in the markets we serve, particularly in China.” Now the chemical industry is facing what he characterizes as a slow-to-no-growth global environment.

Against that backdrop, a few areas of growth stood out. Sales in Dow’s agricultural sciences business reached $1.6 billion in the quarter, up 17% from the prior year. Within the company’s performance plastics business, its packaging segment had a strong quarter. And Dow’s coating materials business reported higher sales and improving demand.

Dow’s earnings improvement came despite price declines across a number of segments, including electronic and functional materials, coatings, and performance materials. For the full year, prices declined an average 2% across all businesses and geographies, net of currency effects. Dow’s full-year earnings declined 24.0% compared with 2011.

At DuPont, plunging prices for the white pigment titanium dioxide contributed to a 55.3% decline in earnings compared with the fourth quarter of 2011. Sales were $7.3 billion, roughly the same as last year. Between the TiO₂ problems and weak demand for fluoropolymers, sales in the company’s performance chemicals segment were down 15%, and profits plunged. Revenues were also lower in electronic chemicals and performance materials.

In contrast, DuPont reported strong demand in its agriculture, industrial biosciences, and nutrition and health businesses. “We’ve adjusted our plans to meet the changing market environment and grow our businesses in a slow-growth world economy,” CEO Ellen J. Kullman told investors, sounding a common theme.

Like DuPont, Huntsman Corp. saw its earnings hurt by the downturn in TiO₂. Huntsman’s sales slipped just 0.5% compared with the previous year’s quarter, but earnings sank 14.7%. “Our pigments division is going through a business cycle where we expect an improvement in earnings beginning in the second half of 2013,” CEO Peter R. Huntsman said.

Huntsman’s advanced materials division also saw lower average selling prices. In January, the company announced it would restructure the business toward lighter, more efficient materials for industries such as aerospace, adhesives, and high-performance coatings. Other Huntsman divisions, including polyurethanes and textile effects, had strong quarters.

Rockwood Holdings was another company that was heavily affected by lower prices for TiO₂. That segment of the company saw adjusted earnings decrease 89.6%, even though volumes were up. Rockwood recently took steps to exit the TiO₂ business. Another key inorganic, lithium, saw both volumes and prices increase on strong demand in batteries and other markets. Overall the company reported a 1.8% increase in sales and an almost 48% decrease in earnings for the quarter.

The earnings whiteout surrounding TiO₂ may haunt the chemical industry for several more quarters, according to Jeffrey J. Zekauskas, chemicals analyst at investment bank J.P. Morgan. “We do not view the TiO₂ market as poised for a sharp turnaround in the coming year,” he wrote in a note to investors. The downturn may be compounded as increased TiO₂ supplies from China find their way to Europe, he added. And to avoid volatile prices, many paint companies are finding ways to use less of the pigment in their products.

One such firm, PPG Industries, had a strong fourth quarter. The paint company saw sales edge up by almost 4% and earnings increase 10.2%. The firm is in the process of selling its commodity chemicals business to Georgia Gulf and adding the North American architectural coatings business of Akzo­Nobel. One area of strong growth for PPG was selling coatings to auto manufacturers.

Cytec Industries similarly plans to benefit from an acquisition and a divestment. It bought British advanced composite maker Umeco and sold its coatings resins business to a private equity firm. CEO Shane Fleming described 2012 as a transformational year, adding that the firm will reorganize its business segments to align with aerospace and industrial markets. For the fourth quarter, Cytec saw earnings increase 9.7% and sales jump 27.3%.

At Eastman Chemical, the strategic shift toward specialties, specifically the company’s January 2012 acquisition of Solutia, raised sales by 25.9% and earnings by 70.0%. On a pro forma basis, however, revenues were flat or lower for all businesses except adhesives and plasticizers, where demand for nonphthalate plasticizers drove sales higher. The firm’s earnings benefited from overall lower feedstock and energy costs.

Some signs are suggesting that the chemical industry will have an easier time in 2013 than it did last year. In an assessment of Dow, Deutsche Bank chemicals analyst David Begleiter said the positive indicators include a recovery in economic growth in China and increased export activity. In addition, “Dow is well positioned to benefit from cheap U.S. ethane as the global ethylene cycle heads to a cyclical peak in 2015–16,” Begleiter wrote in a note to investors.

But some industry watchers are concerned that those indicators are not bankable. “China’s demand for many commodity chemicals and plastics, in particular polyethylene, did not keep up with its [gross domestic product] growth in 2012,” said John P. Rogers, senior vice president at credit rating agency Moody’s. In addition, Europe will continue to be a drain. “We expect European demand for chemicals and plastics to decline,” Rogers warned.

Still, the American Chemistry Council, a trade group, reported that U.S. chemical production rose 0.9% in December 2012 and 0.7% in January 2013. ACC said manufacturers increased output in several key chemical markets, including appliances, motor vehicles, aerospace, construction supplies, machinery, computers, plastics products, paper, structural panels, textile products, printing, apparel, and furniture.

Likewise, Moody’s Managing Director Mark Gray anticipates that consumer spending will be on the upswing this year due in part to stronger residential construction and home sales. The trends have improved the outlook for consumer durable goods. “And while middle-income earners will remain cautious for some months yet, we also expect spending on discretionary products to gradually increase,” he said.