Tough Year Ahead for Chemicals

January 29, 2009

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With recovery hinging on numerous external factors, chemical industry players are cutting back production, shuttering or idling plants and conducting massive layoffs to stay afloat in the meantime.

For most of 2008, the global chemical industry remained comparatively stable thanks to strong balance sheets and emerging market demands. It wasn't until September, when the economic crises hit full force that the chemical industry crashed into a wall that it is still not yet recovering from. Although fourth-quarter results will not be posted for a few weeks, expectations are not high and analysts predict the first six months of 2009 will remain gloomy, Chemical & Engineering News reports.

Chemical industry CEOs agree, with only 17 percent very confident in achieving growth in 2009, according to the latest global survey of chemical industry CEOs by PricewaterhouseCoopers. Of the 48 chemical CEOs surveyed, 65 percent believe that the disruption of the capital markets will affect their expansion plans and half say they will have to reduce their growth expectations.

They're not off the mark. The American Chemistry Council (ACC) predicts world economic activity to slow markedly in 2009, which will affect the chemical industries negatively, ICIS Chemical Business says. Global chemical output will rise by only 1.5 percent in 2009, in comparison to the 2.2 percent rise from 2008. In the United States, the ACC predicts U.S. chemical output, excluding pharmaceuticals, to shrink by 3.6 percent this year, continuing the trend that began last year when demand tumbled and output, in turn, diminished.

In 2008, agricultural chemical volume decreased by about 3 percent, basic organics production dropped 13.4 percent due to hurricane-related shutdowns and overall chemical plant operating rates slipped 2.4 percent to an average of 76.8 percent, C&EN reports.

"The breadth and depth of the demand dislocation are profound, and we expect another round of estimate downgrades," Paul Satchel, analyst at insurance group ING, tells ICIS Chemical Business.

Towards the end of 2008, chemical companies announced plant shutdowns, layoffs and other cost-cutting methods in response to the drop in demand. In the U.S. alone, 15,000 chemical industry jobs were lost in 2008, down 1.7 percent from 2007, and economists expect the situation to get worse in 2009, C&EN says.

"We see the sector as significantly at risk of a further downward correction in the next six months," Satchel adds.

The ACC initially predicted a 3 percent employment drop in the chemical industry this year when it projected operating rates to slow to 75 percent as plants are idled or shut down. Those predictions were before large chemical firms such as Dow Chemical, DuPont and Praxair announced total employment losses and further cuts were announced by Rohm and Haas, PolyOne and Huntsman Corp.

T. Kevin Swift, chief economist for the ACC, tells C&EN that he expects he'll have to revise his forecast for an even larger loss.

While the predictions are worrisome, the anticipated U.S. chemicals output decline of 3.6 this year is less steep than during 2001 recession when chemicals output dropped by 6.9 percent, C&EN reports. Analysts also believe profit declines could be less severe this time around because of higher specialty components, cost savings and stronger balance sheets than the last downturn, ICIS Chemical Business adds.

Still, economists predict a slow recovery with demand increases hinging on factors outside of the industry's control such as home prices, consumer confidence and a possible federal stimulus package. "We're not going to see what real demand is like until the first or second quarter of 2009," notes Longbow Research analyst Dmitry Silversteyn to ICIS Chemical Business.

The only bright spot, it seems, lies in the dropping raw materials costs. Petrochemicals and other input prices are falling, ICIS Chemical Business reports, adding that the U.S. Energy Information Administration projected oil prices to average about $60 per barrel.

Nonetheless, Silversteyn says "we're not seeing raw material prices decline meaningfully yet for specialty chemical firms, even as we see upstream petrochemical prices down sharply. It takes time — a quarter or two — for these raw material declines to filter down the supply chain."

As such, earnings visibility could remain cloudy over the next few months, ICIS Chemicals Business adds.

Resources

World Chemical Outlook by Alexander H. Tullo, Melody Voith, Partricia Short and Jean François Tremblay Chemical & Engineering News, Jan. 12, 2009

World Chemical Outlook: United States by Alexander H. Tullo, Melody Voith, Partricia Short and Jean François Tremblay Chemical & Engineering News, Jan. 12, 2009

Wall Street and Financial Analysts Give Their 2009 Profit Outlook for Chemicals by Joseph Chang ICIS Chemical Business, Dec. 31, 2008

15,000 Jobs Lost by Marc S. Reisch Chemical & Engineering News, Jan. 19, 2009

Chemical Makers Stage More Cuts by Ann Thayer Chemical & Engineering News, Jan. 26, 2009

12th Annual Global CEO Survey (Chemicals Summary) PricewaterhouseCoopers

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