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Chemical Companies End Year On Positive Note

Fourth-quarter demand for commodities and agriculture products lifted chemical makers

by Melody M. Bomgardner
March 10, 2014 | A version of this story appeared in Volume 92, Issue 10


For the U.S. chemical industry, 2013 wasn’t exactly a barn burner, but thanks to a strong fourth quarter, earnings for 20 firms tracked by C&EN grew by 2.6% compared with 2012. Axiall, Dow Chemical, Eastman Chemical, W.R. Grace, and Westlake Chemical all saw earnings rise by more than 25%. The positive financial reports and generous cash payouts to shareholders may help quiet activist investors who are calling for the restructuring of big chemical firms.

In the fourth quarter, Dow more than doubled its earnings to $793 million compared with the same period in 2012. Its earnings per share of 65 cents were 22 cents above analyst expectations because of better than expected commodity chemical performance, according to Charles Neivert, an analyst at investment bank Cowen & Co.

Credit for Dow’s good quarter also goes to strong demand and access to cheap natural gas from shale. Sales in the firm’s coatings and infrastructure business, for example, rose 10%, and earnings for the segment more than tripled compared with the previous year’s quarter. Healthy demand for the firm’s performance plastics, including food-packaging resins, pushed sales up 8%. Prices were also higher, leading to a doubling of earnings in the plastics segment.

For the year, Dow saw earnings jump 32.5% compared with 2012, while sales grew by 0.5%. Still, Dow’s portfolio has its critics, such as Daniel S. Loeb of the hedge fund Third Point, a big Dow investor who would like the firm to sell off all its commodities assets and focus on specialties. Dow plans a more surgical sale of commodity businesses in styrenics, epoxies, and building materials.

In a conference call with analysts, Dow’s chief executive officer, Andrew N. Liveris, stressed that his company is generating heaps of cash. He announced that the firm will hike its share repurchase target to $4.5 billion from the previous $1.5 billion. Dow also raised its quarterly dividend by 5 cents to 37 cents per share. “Our company is strong. We have a very focused and integrated portfolio, a rising and increasingly growing earnings profile, and tremendous financial flexibility,” Liveris said.

At Eastman, the board seems to be taking a page out of the Dow playbook. On Feb. 20, the firm announced it will repurchase up to an additional $1 billion of stock. Eastman also raised its dividend by 5 cents to 35 cents per share to show its commitment to returning value to stockholders. Higher sales of Tritan copolyester and other plastics sold to the packaging industry helped boost the firm’s earnings for the year by 25.7% compared with 2012.

The price of natural gas—the feedstock of choice in the U.S.—has plummeted relative to that of oil. SOURCE: U.S. Energy Information Administration
A line graph showing the relative prices of crude oil and natural gas from 2000 to 2014.
The price of natural gas—the feedstock of choice in the U.S.—has plummeted relative to that of oil. SOURCE: U.S. Energy Information Administration

Selling construction materials was a great earnings strategy for Axiall, W.R. Grace, and Westlake in 2013. Axiall benefited from its acquisition of PPG Industries’ chemical business in January 2013. It also enjoyed strong margins in its building products segment, thanks to lower raw materials costs. The enlarged company had 40.3% greater sales in 2013, and earnings jumped by 92.8%.

Meanwhile, Grace saw operating income for its construction products business expand by 21.2% to $151.7 million for the year, its highest segment earnings since 2008. And the company emerged from bankruptcy on Feb. 3. “I’m excited about the improved strategic position of our company and looking forward to solid earnings growth in 2014,” said CEO Fred E. Festa.

DuPont did not enjoy the twin benefits of expanding demand and shrinking feedstock costs for commodities; its full-year earnings rose just 1.9%. However, most segments of the company had strong sales and earnings in the fourth quarter. In particular, unusually early demand for insecticides and seeds resulted in $88 million in operating earnings for the firm’s agriculture segment, compared with more standard fourth-quarter losses.

Another end-of-the-year turn in fortunes for DuPont was demand improvement and market share gains for chemicals used in photovoltaics. Prices and demand were also higher for nutrition products such as proteins, probiotics, and cultures. And increased sales into packaging, automotive, and industrial markets boosted earnings of DuPont’s performance materials unit.

DuPont reported that fourth-quarter earnings were down for performance chemicals, particularly titanium dioxide and refrigerants. Performance chemicals are on the chopping block; CEO Ellen J. Kullman told investors over the summer that DuPont will spin the business off to focus on agriculture and nutrition, biobased chemicals, and advanced materials.

Ashland is also in a selling mood, having recently announced the sale of its water technologies business to private equity firm Clayton, Dubilier & Rice for $1.8 billion. “We intend to be a smaller, more agile organization with better cost control, improved visibility, and greater accountability,” James J. O’Brien, Ashland’s CEO, promised shareholders.

Although Ashland’s earnings grew 12.1% in 2013 compared with the previous year, the company has had trouble generating sales growth because prices have eroded. In the fourth quarter, sales shrunk 5.4%.

Looking ahead, the chemical marketplace in 2014 will be a lot like it was late last year, stock analysts say. Companies with feedstock advantages and management cost-cutting initiatives will perform best, at least in the first half, according to Laurence Alexander, chemicals analyst for the investment bank Jefferies. In the first quarter, a spike in energy costs and weather disruptions are likely to put a damper on consumer spending, he cautioned.

Still, industry watchers expect this year to bring modest growth in demand for chemicals. At the end of January, the American Chemistry Council, a trade association, said its Chemical Activity Barometer strengthened slightly from December. The increase indicates a moderate pace of growth.

“Slow and steady isn’t a bad thing when you consider the alternative,” said T. Kevin Swift, ACC’s chief economist. “This recovery seems to lag compared to previous postrecession recoveries, but overall the fundamentals remain strong, including the ongoing expansion in chemistries related to construction and consumer-related resins, as well as light-vehicle sales.” Swift listed electronic chemicals, food additives, foundry chemicals, lubricants, and paint additives as among the segments showing strong gains.

And as chemical executives scan the world for growth markets, many expect to find it here in the U.S. According to the consulting firm PricewaterhouseCoopers, 56% of global chemical CEOs expect the world economy will improve over the next 12 months, and 44% rank the U.S. as one of the most important countries for growth. Executives on the prowl for acquisitions will be shopping in the U.S. because of the boom in shale gas production, says Antoine Westerman, PwC’s global chemicals leader.

Jefferies’s Alexander suggests that Dow may be one of those companies looking to acquire. It may do so to strengthen its energy and feedstocks position or to add to downstream businesses in specialty materials, specialty plastics, and agriculture. But Liveris will be making any such moves with the knowledge that activist shareholders expect Dow to keep its stock price up.

“We are confident that our financial discipline, cost-savings actions, and active portfolio management position us well to deliver against our commitments for long-term success,” Liveris said as he wrapped up his conference call remarks. “We are exiting commodity businesses for value, we are deploying funds to grow our integrated value chains, and we will increasingly remunerate our shareholders.”


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