October 20, 2008

Volume 86, Number 42

p. 11

Stormy weather

Chemical Firms Brace Investors For Bad News

Man-made and natural disasters haunt earnings

Melody Voith

CHEMICAL COMPANIES are preparing investors for what will likely be a weak third-quarter earnings season. Several firms are warning that financial results will falter in the face of the global credit crisis and the hurricanes that hit the Gulf Coast a month ago.

Firms that invested in now-devalued securities will have to address the impact on their balance sheets. Olin, a chlor-alkali producer, has announced that it will write down the full value—$26.6 million—of corporate debt securities in which it invested. Olin says the issuer of the debt ceased trading and appointed a receiver as a result of financial market turmoil.

Meanwhile, specialty chemical company Ashland says it is monitoring the value of more than $200 million in securitized student loans in which it invested the proceeds of earlier divestments.

Nalco and Cytec Industries have joined Air Products & Chemicals and PPG Industries in announcing that third-quarter earnings will fall short of earlier estimates. All four companies point to disruptions due to Hurricanes Gustav and Ike. In addition, an employee strike at aerospace firm Boeing slowed orders at Cytec and PPG.

Although Dow Chemical hasn't issued a warning, JPMorgan expects the company to report earnings that are well below Wall Street expectations. In a report to clients, chemical stock analyst Jeffrey J. Zekauskas notes that some Dow plants still aren't up to speed after the hurricanes. In addition, he says, the credit crisis may mean the firm has to pay more to finance its pending acquisition of Rohm and Haas.

The longer lasting bad news is the likelihood of a slowdown in industrial and consumer spending, analysts say. "You will see a ripple effect from credit markets to industrial activity around the holidays and the first part of next year," Jefferies & Co. chemical analyst Laurence Alexander tells C&EN.

Already, Cytec's surface specialties business has seen deterioration in U.S. demand and a sharper than expected slowdown in Europe. At Air Products a slowdown in manufacturing of semiconductors and liquid-crystal displays has weakened demand for electronic materials.

Although most companies have not released earnings alerts, investor fears of a global economic slowdown have taken their toll on chemical company stock prices. In an Oct. 15 report to clients, Alexander pointed out that "despite almost a decade of acquisitions, divestitures, investment, innovation, and restructuring, the chemical sector has now declined, on average, 57% from peak levels."

Chemical & Engineering News

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