IHS Chemical Week

CHEM IDEAS

Slow, but Still Growing

12:08 PM MDT | October 7, 2011 | By ROB WESTERVELT

CW’s cover story this week gauges current industry conditions and sentiment as financial turmoil weighs on the global economy. Chemical makers are more cautious than earlier this year, but there are no signs of a major downturn. Demand is down from the strong pace of early 2011, but chemical makers and the global economy continue to keep their heads above water (p, 29).

Financial and equity markets, however, would indicate a much bumpier landing. Chemical stocks in the CW75 Index are off about 26% since the start of the second quarter, versus a drop of 16% for the S&P 500. Laurence Alexander, analyst with Jefferies (New York), notes that the sharper decline for chemical makers, viewed as cyclical, are typical of periods when the market worries about recession risks. Certain subsectors have lagged sharply, most notably the upstream commodity chemical producers, which have underperformed by 13%, Alexander says. Midstream companies that mostly sell into consumer nondurables have seen 25% underperformance, and downstream companies that sell into the plastics and packaging markets have underperformed by 29%. “This is in line with a consumer-driven slowdown,” Alexander says.

Some of the demand slowdown reflects inventory adjustments as lower energy and feedstock costs and uncertainty push buyers and consumers into more defensive positions. Inventories are being squeezed, but producers say underlying demand and orders are holding, albeit at a more subdued pace than early 2011.

Even if demand should drop, industry is in a much better position to deal with turmoil. Dow Chemical said at its investor meeting last week that it would generate $2.50/share in earnings, and $8 billion in Ebitda, in 2012 if the demand environment were similar to 2009. That is well above the actual 2009 full-year result of 63 cts/share, and Ebitda of $4.6 billion. A better cost structure, lower debt and interest costs, and better preparation after the harsh lessons 2008, have chemical makers in a much better position to handle market and economic volatility.













 
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