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Europe chemical groups underline slowdown worries
July 28, 2011 / 10:02 AM / 6 years ago

Europe chemical groups underline slowdown worries

BRUSSELS/FRANKFURT (Reuters) - Three of Europe’s top chemical groups added to mounting worries over a global economic slowdown on Thursday as they signaled a squeeze from weakening demand and rising input costs.

German rivals BASF (BASFn.DE) and Bayer (BAYGn.DE) and Belgium’s Solvay (SOLB.BR) indicated they saw no quick easing in raw material cost inflation, and while they reiterated full-year outlooks, their watchful stance suggested that earnings growth could soon taper off.

Chemicals sector earnings are among the most sensitive to changes in economic growth as companies are slow to cut overhead costs from large-scale plants when utilization rates drop.

While wrangling over the U.S. debt limit has unnerved investors, debt problems in Europe, notably in Italy and Greece, are also weighing on markets concerned that the global economy is heading for another downturn after the financial crisis.

Adding to the bearish mood, data on Thursday showed the number of unemployed in Germany fell less than expected in July, while Dutch staffing firm Randstad (RAND.AS), warned its growth is being held back because clients are facing so much uncertainty and German engineer Siemens (SIEGn.DE) cautioned that global economic risks were increasing.

ING analyst Fabian Smeets said the chemicals sector is not only facing rising costs, but weakening demand especially companies close to end consumers who are “down and out,” but also in construction, the automotive and consumer sectors.

“Consumers are still on the ropes and every time prices rise too quick or too fast they are spending less,” Smeets said.

“If chemicals companies keep raising prices, maybe they can do that for one or two quarters, but consumers will start spending less, which is a reason why are bearish on 2012.”

Shares in BASF fell 5.2 percent, while Bayer slipped 3.5 percent and Solvay edged 2.2 percent lower by 0954 GMT as the Stoxx 600 European Chemicals index .SX4P fell 2.6 percent.


BASF, the world’s largest chemicals firm by sales, reported weak quarterly profits hit by the loss of Libyan oil output and said global economic growth was slowing.

Fellow German group Bayer also underscored worries over macroeconomic conditions as weaker volumes in plastics and foam chemicals overshadowed strong demand for its pesticides.

Bayer’s MaterialScience unit -- the world’s largest maker of plastics for car lights and sports goggles -- raises prices but sales volumes suffered, Bayer said. It added that there are increasing signs of slowing economic growth.

Markus Huber, head of sales and trading at ETX Capital, said Bayer, like many other companies, “is facing many challenges.”

“Examples are a continued weakening of the U.S. dollar, a potential slowdown of growth in China/Asia and an escalation of the European credit crisis which could further dampen growth within Europe,” Huber said.

While Solvay, which is buying French group Rhodia RHA.PA, kept its guidance for higher full-year operating profit, it too was watchful on the economy and the evolution of energy and ethylene costs.

The delicate balance between raising prices without hitting volumes was demonstrated by Dow Chemical DOW.N, which said on Wednesday it increased prices by 19 percent, or roughly $2.4 billion, to offset the $1.5 billion increase in costs to report impressive quarterly results.

Dow warned, however, that sales in construction and coatings business stayed soft due to lackluster North American demand, echoing comments from AkzoNobel (AKZO.AS), the world’s largest paints maker, which reported lower profits.

Solvay takeover target Rhodia said it was confident it can “favorably manage selling prices” to offset higher costs as it reported record EBITDA of 297 million euros. (Writing by Aaron Gray-Block, Editing by Sitaraman Shankar)

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