BUSINESS
Chemicals' Midyear Performance Better Than Expected Industry's long string of profit drops is ending after big market pickup in second quarter; outlook is even better for second half David Webber, C&EN New York
With one piece of good economic news after another going off like so many Independence Day rockets, it's no wonder so many economists arid securities analysts seem lit with a holidaylike euphoria. The final weeks of June brought reports of booming automobile sales and housing starts, steadily rising industrial production, and climactically, the Commerce Department's "flash" estimate that the gross national product expanded in the second quarter at an annual rate of 6.6%, adjusted seasonally and for inflation. That growth rate is as good as any registered in the second quarter of an economic recovery since World War II, and many forecasters whose lexicon of adjectives had been limited to "slow" and "plodding" have begun calling the recovery "robust." The signs of recovery in the chemical industry have been somewhat less exhilarating, partly because the industry tends financially to lag such primary markets as automobiles and housing by about six months. Still, there are numerous examples of performance surpassing expectation in the second quarter. Hercules, for instance, now forecasts that its second-quarter operating profit will be up 30% from the same period last year. For all of 1983, says chairman Alexander F. Giacco, operating profits will rise more than 40%. And Allied chairman Edward L. Hennessy Jr. now says the company will record 10
July 4, 1983 C&EN
a net income of $100 million or more in the second quarter, still below the $107 million it earned during the same period in 1982, but well above the $85 million to $95 million it had predicted just a few months ago. This kind of mixed outlook—some companies doing better than in the 1982 period, some companies doing worse, but better than expected— typifies the latest estimates of the chemical industry's performance during the second quarter. Most firms certainly will do better than they did in the first quarter of 1983, but the year-to-year comparison will look less successful. Analysts point out that although sales tonnage was up in the second quarter, sales dollars were relatively flat because the industry failed to make much headway raising prices during the first half of the year. On the other hand, many producers have improved their break-even points (C&EN, March 28, page 22), so plants
Chemical output has risen steadily since November... Production index, chemicals and products (1967 = 100)a
210
can make money at lower rates of capacity use. Consequently, earnings reports are likely to vary widely from company to company. Operating profit for the chemical industry as a whole can be summed up in one analyst's terse comment: "flattish." But that is far better than the 27% decline reported by the 30 largest chemical producers in the first quarter. And even then, the mix in results that customarily marks the turning point in an economic cycle was apparent: Half of the top 30 companies reported an increase in income. There is a definite upward trend that analysts expect second-quarter reports to verify and third-quarter performance to improve. And analysts also point out that, to a great extent, the anticipated lack of spark in the second-quarter reports belies the actual rate of acceleration they detect in the chemical industry's recovery. There are clear signs now,
. . . and the inventories-toshipments ratio has fallen lnventories-to-shipments ratio 3 1.6 1
205 Chemicals and { allied products
industrial chemicals
a Seasonally adjusted. Source: Federal Reserve Board
a Seasonally adjusted. Source: Commerce Department
j
CHECKOFF they say, that the second half of the year will be far better than the first half. For one thing, they believe chemical sales in May were far better than in April, and in June much better than in May. Just as important, the outlook for prices is better. Producers announced a barrage of price increases for July 1, and analysts, by and large, expect the majority of them to succeed. "A good chunk of them will stick," says Peter P. Pranis Jr., senior consultant at Probe Economics, a forecasting firm in Mt. Kisco, N.Y. "Producers are asking for the sun. They will accept the moon." "This is the best tone of the market for pricing since early 1979," remarks Lester Ravitz, chemical specialist at Salomon Brothers, a New York City brokerage house. "If the industry can't get prices up in the current environment, then it will be two years before it sees a better opportunity." The improved "tone" comes from higher production levels, a lower inventories-to-sales ratio, and a seeming moratorium on the market share skirmishing that helped scuttle so many price initiatives during the recently ended recession. The Federal Reserve Board index of production for chemicals and allied products rose steadily over the first third of the year, from its recession low point of 192.8 in November 1982 (1967 = 100) to 209.9 in April. The Federal Reserve estimate of chemical industry capacity utilization rose from 65.1% in November to 72.8% in April. At the same time, the inventories-to-shipments ratio for chemicals and allied products, which had soared to 1.51 last October, sank steadily to 1.32 in March before moving up slightly to 1.34 in April. The narrower ratio for industrial chemicals has registered more up and down movement, but essentially has declined from 1.44 in October 1982 to 1.32 in April. What particularly encourages chemical industry analysts is, in fact, the typical six-month lag between a surge in housing and automobiles and a subsequent surge in demand for chemical products. According to the Commerce Department, housing starts shot up to a seasonally adjusted annual rate of 1.79 million units in May, the highest since September
1979. And during the first 10 days of June, the nation's three largest auto makers report, car sales rose to a seasonally adjusted annual rate of 7.4 million units, up from a 6.7 million rate in May. For comparison, in 1982 housing starts totaled 1.06 million units. New auto sales amounted to a meager 5.7 million units. These figures promise good things to come for chemical producers, but analysts caution that companies are not profiting equally from the economic recovery. "Fibers and plastics are the two relatively stronger areas," comments Jack Henry, chemical specialist at E. F. Hutton, a New York City brokerage house, "and fertilizers and heavy organics are relatively the weakest. So the downstream companies are the ones that are faring better." In explaining his company's revised estimate of second-quarter earnings, Allied chairman Hennessy noted that Allied's chemical products were doing very well, with the exception of agricultural products and soda ash. And Salomon Brothers' Ravitz sees other companies whose second-quarter income will be curbed by poor agricultural chemical performance. Stauffer Chemical, he says, for instance, is getting "creamed," because its agricultural product market depends heavily on corn and the amount of acreage planted with corn this season is down 30%. Monsanto, on the other hand, is weathering the agricultural chemicals slump better because it is marketing aggressively overseas its biggest product, Roundup, and because another major herbicide, Lasso, which normally depends for about two thirds of its sales on corn growers, has picked up some share in the healthier soybean market. Ravitz expects Monsanto's operating income, which was $2.47 per share in the first quarter, to rise to between $2.70 and $2.75 in the second quarter. That would be up handily from the $2.39 per share earned in secondquarter 1982. Hutton's Henry expects Du Pont operating earnings to be down in the second quarter, despite an increase in chemical profitability. Conoco is the culprit. Ravitz agrees, noting that net income actually will rise because Du Pont has lowered its overall costs,
NEW PLANTS • Hexanedlol. Badische plans to build unit at Freeport, Tex., with capacity of 13 million lb a year for 1,6-hexanediol, used as component of coatings, specialty urethanes, adhesives, and polymeric plasticizers. Construction will begin this year with completion scheduled for fourth-quarter 1984. Technology will be from BASF, which uses it in Ludwigshafen, West Germany. • Polyvinyl alcohol. Air Products will expand capacity for this resin at Calvert City, Ky., from 60 million lb a year to 100 million lb. Work will be done in two phases, with first due on stream in early 1984 and final phase by late 1985. • Pressure emulsions. Air Products also will expand capacity for vinyl acetate-ethylene and ethylene-vinyl chloride pressure emulsions 40% at Calvert City, Ky., and South Brunswick, N.J.; completion scheduled for late 1984. • Sodium chlorate. Alabama River Pulp Co. will build 14,000 ton-per-year plant at its Clairborne, Ala., pulp mill for this bleaching material; startup due in March 1984. Project is first of HO Process Co., partnership of Olin and Huron Chemicals of America Inc., involving design, construction, and operation of plant using technology developed by Huron. • Sweetener. G. D. Searle has contracted for construction of $100 million plant in Augusta, Ga., to make proprietary form of low-calorie sweetener aspartame. Construction is to begin soon and be completed in early 1985; plant design to allow for future expansion and changes in technology. PLANTS COMPLETED • Catalysts. Katalistiks International Inc. has put on stream in Savannah, Ga., what company calls world's second-largest fluid cracking catalyst plant. The $25 million plant has minimum rated capacity of 60,000 tons per year of company's various proprietary catalysts for cracking petroleum. • Industrial gases. Air Products has completed 250 ton-per-day nitrogen plant at Sunnyvale, Calif. Nitrogen from plant will be fed into company's recently extended pipeline serving semiconductor manufacturers in area, known as "Silicon Valley," bringing number of plants in system to five. Air Products also has completed construction of tetrafluoromethane (CF4) plant adjacent to Hometown, Pa., specialty gas plant, with undisclosed capacity. CF4 is used in plasma etching, technology that is part of semiconductor and circuit board manufacture. Union Carbide's Linde division has completed $30 million industrial gases facility at Hatfield, Pa., with combined capacity of more than 1000 tons per day for liquid oxygen, nitrogen, and argon. New facility replaces old industrial gases operation in Essington, Pa.
July 4, 1983 C&EN 11
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Business especially debt service. Ravitz is more optimistic about Dow Chemical. He believes that Dow's operating income, a meager 28 cents per share in the first quarter, will be about 45 cents per share in the second quarter (compared to 40 cents in secondquarter 1982), and will rise to between 60 cents and 70 cents in the third quarter and to more than 75 cents per share in the fourth quarter. Overall, in fact, analysts see few danger signs as the chemical industry moves into the second half of the year. Inventories, which wreaked havoc with the industry during the past recession, they now believe to be under control. "There was a lot of inventory buildup during the second quarter [in the general economy], but not as much in the chemical industry," says Probe Economies' Pranis. "In 1981, chemical companies built up inventory on speculation, but I don't think the financial types will let them get away with it again." Analysts say that the slight upturn in the inventories-to-shipments ratio for chemicals and allied products seen in the latest statistics is not really a cause for concern. Hutton's Henry notes that there was some buildup during May and June, especially in fibers, and that there has been some stockpiling of chemical materials in advance of the July price increases. But such inventory bulges are temporary, he says, and in fact undoubtedly helped raise the June sales total. Nor do analysts foresee a quick return to the price-cutting that has characterized the market share battles of the past. "Intellectually, people have come to accept the idea that fighting for market share doesn't help," says Pranis of Probe Economics, "and everyone is hoping that no one starts cutting prices. The power of the marketers has been tempered by the cold, beady eyes of the financial people. They just keep asking how much getting more market shares will help the bottom line." Still, analysts caution that the euphoria created by the recent spate of good economic news is probably an overreaction on the part of economists tired of being cautious. Most still anticipate a recovery that will
fall far short of being robust. All the major indicators may be going up now, they say, but the massive and growing federal budget deficit remains a serious restraint. "The financial markets expect to be looking at more years of this Roman circus of heavy deficits," says Pranis. "That's why real interest rates are so high. It's an uncertainty premium." But most analysts believe a slow, modest recovery will not be all bad. For one thing, it will discourage excessive inventory buildup and price-cutting. And growth this year is still expected to be solid. Hutton's Henry forecasts a year-to-year increase of 10 to 15% in chemical sales and a 20% rise in corporate operating income. Since income was down in the first quarter and probably flat in the second, Henry says the jump during the second half of the year will be on the order of 30%. "The business has definitely turned the corner," says Salomon Brothers' Ravitz. •
The Eighth Meeting of
ISMAP • •
INTERNATIONAL SOCIETY OF I MAGNETIC RESONANCE •
NMR-MQR-EPR applications in Physics Chemistry Biology Medicine August 22-26, 1983 Chicago, U.S.A.
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