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July 04, 2011
Volume 89, Number 27
pp. 34 - 35

A Long Year of Demand Recovery

Cost cutting boosted finances, but it took four quarters for sales volumes to return

C&EN Business Group

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The chemical industry saw its fortunes turn on a dime in early 2010. Demand from customers facing depleted inventories fueled a brisk rebound from the recession of 2007–09. As the year progressed, stronger sales spread to almost all sectors of the chemical economy.

For U.S. chemical makers, the recession hit its lowest point in the first quarter of 2009. One year later, earnings were up by a striking 167%. Electronics and performance materials were the first to bounce back, as a result of renewed global demand for photovoltaics, semiconductors, autos, and consumer products. Although sales were strong in some segments, much of the earnings jump was due to severe cost-cutting programs that continued into 2010.

Dow Chemical was able to take advantage of the improvements in so-called early-cycle markets thanks to its integration of Rohm and Haas businesses. But it also profited on the commodity side by raising prices for basic plastics. Fast-growing customers in Asia-Pacific and Latin America were willing to absorb the hikes. Meanwhile, DuPont added profits from its agriculture and nutrition division, mostly due to strong U.S. sales in its seed business.

Still, for Dow, DuPont, and most other U.S. chemical firms, it would take the rest of 2010 to approach prerecession sales volumes for many products. And chemical executives were careful to point out that the global economic recovery was modest. In the meantime, they warned investors that the flip side of recovery would be higher costs for energy and raw materials.

By midyear, demand had returned for intermediate chemicals and specialty chemicals for packaging and coatings, particularly from Asia. But few of those sales went to construction in the developed world, a market that stayed in the dumps throughout the year. And it wasn’t until the fourth quarter that chemical firms could say that volumes grew in nonconstruction markets in the U.S. and Western Europe.

Chemical companies based in Europe had a ride similar to that of their U.S. counterparts in 2010. Firms such as Arkema and DSM that were able to answer rising demand for performance products were first to heal battered balance sheets. By the end of the year, most sectors had recovered to prerecession volumes. Construction chemicals and pharmaceuticals continued to be a drag on earnings, however.

Only two of the European chemical firms tracked by C&EN— Solvay and Kemira—posted a sales decline in 2010. But both completed major divestitures during the year. And earnings increased for every firm except Bayer and GlaxoSmithKline.

Japanese firms were also reporting strong earnings by the second quarter. The industry was in a good position to export electronics materials to other markets in Asia where demand was vigorous. Meanwhile, Shin-Etsu Chemical was able to do what other companies could not: It found international buyers for polyvinyl chloride resins.

Still, the increased orders were not enough to entice chemical firms to invest in more plants and equipment. Indeed, manufacturing facilities were not working anywhere near maximum capacity. Capital expenditures were mostly flat in the U.S., Europe, and Japan. But all regions kept up their spending on research and development, because companies recognized that new products were what allowed them to increase earnings as the recession faded away.

Research spending did not rescue the pharmaceutical industry in 2010. Compared with the chemical industry, drug makers had a lousy year, returning on average worse results for shareholders than in 2009. The reawakening global economy also did little to help firms make money in pharmaceuticals. Instead, companies were beset by expiring patents on blockbuster drugs, stalled pipelines for new compounds, pricing pressures, and even costs related to health care reform.

One example of a pain point was Pfizer’s cholesterol drug Lipitor, which will lose patent protection in the U.S. in November of this year. In 2010, sales of the drug were hurt by new generics competition in Spain and Canada.

To help stop the bleeding, pharmaceutical firms have worked to drastically pare their R&D programs. Large acquisitions in 2009, such as Merck & Co.’s purchase of Schering-Plough, led to an acceleration of the streamlining process in 2010.

Most profitable chemical company, in earnings
Chemical & Engineering News
ISSN 0009-2347
Copyright © 2011 American Chemical Society
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