U.S. chemical companies punch drunk as economy slows

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ANALYSIS- U.S. chemical companies punch drunk as economy slows Wednesday December 20, 4:09 PM EST By Paul Thomasch

NEW YORK, Dec 20 (Reuters) - Up against the ropes, U.S. chemical companies are rushing all at once to warn investors of profit shortfalls after being hit by a deadly combination of soaring energy prices and a slowing economy.

The one-two punch has been bad for business to say the least. Red-hot oil and gas prices have made producing chemicals much more expensive, while a slowing economy has taken a bite out of sales of everything from home building products to automotive materials.

"We think the fourth-quarter is going to be ugly," said P.J. Juvekar of Salomon Smith Barney. "We're going to see a lot of companies pre-announce earnings or issue disappointing results."

John Roberts, an analyst with Merrill Lynch & Co., can rattle off a list of chemical companies that have already warned about profit shortfalls -- including Solutia Inc. (SOI) and Rohm and Haas (ROH) -- and said more may follow.

"It's broad-based," he said. "It's just a continuation of what's been the matter in the industry all year."

CUTTING ESTIMATES

The problems faced by both specialty and major chemical companies have not been lost on investors, who have steadily sold off stocks over the course of the year.

So far this year, the Standard & Poor's index of chemical companies -- which includes concerns such as DuPont Co. (DD), Dow Chemical Co. (DOW), and Eastman Chemical (EMN) -- has tumbled some 26 percent.

By now, investors appear to have grown so accustomed to the bad news from chemicals companies that they were willing to buy up Rohm and Haas (ROH) on Tuesday even after the Philadelphia-based company warned it would miss fourth-quarter earnings targets.

Blaming slowing sales and high prices for natural gas -- a key raw material -- the company said earnings could fall as much as 17 percent below analysts' expectations for the quarter.

Its shares rose more than 6 percent to $31-7/8 on Tuesday, but were down 1/4 at $31-5/8 Wednesday afternoon.

Also Tuesday, specialty chemical company PolyOne Corp. (POL), formed by the merger of Geon Co. and M.A. Hanna Co., warned of a fourth-quarter loss of between 10 and 15 cents a share, at least a nickel wider than the anticipated loss.

And Ashland Inc. (ASH), which distributes chemicals and and also has an oil refining business, said the same day its fiscal first-quarter earnings wouldn't meet expectations.

Banc of America analyst Mark Gulley said in a report Wednesday he planned to cut estimates for many of the companies he follows.

"The U.S. specialty chemicals industry faces an unfavorable combination of slowing economic growth, a weak yen, and cost push inflation as a result of soaring natural gas prices, which affect both raw materials and energy costs," he wrote.

Natural gas prices on the New York Mercantile Exchange (NYMEX) since mid-February have soared to a record of nearly $10.00 per million British thermal units this month from $3.00 per million BTUs.

And while oil prices have recently dipped -- down to around $27 a barrel on the NYMEX -- they hit 10-year highs of almost $38 just three months ago.

RIGHT JAB

Throughout the year, surging energy costs have hurt the biggest chemical companies -- such as DuPont, Dow, and Union Carbide Corp. (UK) -- as well as the specialty concerns.

DuPont, the No. 1 U.S. chemical company, saw energy prices cost it $250 million in earnings during the third-quarter, cutting profits by 14 percent from a year ago.

Merrill's Roberts figures Wilmington, Del.-based DuPont -- and rivals such as Union Carbide -- could face more trouble this time around.

"People have reduced estimates several times this year, but I would not rule out another round of reductions," he said.

LEFT HOOK

Energy prices alone would be tough enough for the chemical industry. But a slowing U.S. economy makes this an even worse time for a business that makes chemicals and plastics used in just about everything.

When Home Depot Inc. (HD) warned in October, for example, that its earnings would miss targets alongside a slowdown in home building, chemical companies had little choice but to pay attention.

If Home Depot isn't selling as much paint as it once did, then chemical companies see demand for their products fall.

What's more, that holds true for slower sales in industries like consumer products, lumber, or automotive manufacturing. A bad time for those industries spells trouble for chemical companies in other words.

"Demand for their products is obviously slowing," said Juvekar of Salomon Smith Barney. "But raw material pressures are not abating. And that's going to be a real challenge for companies this quarter and next."

http://money.iwon.com/jsp/nw/nwdt_rt.jsp?section=news&news_id=reu-n20601640&feed=reu&date=20001220&cat=INDUSTRY

-- Martin Thompson (mthom1927@aol.com), December 20, 2000


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