The Wall Street Journal-20080122-Chemical Industry-s Shift- Companies- Results Could Be Burnished By Foreign Presence
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Chemical Industry's Shift; Companies' Results Could Be Burnished By Foreign Presence
With growing weakness in U.S. housing and auto sales -- two of the chemical industry's biggest sources of business -- fourth-quarter results will offer a window into who in the industry is positioned best to weather a U.S. downturn.
Much of the answer will lie in how much business chemical companies have been able to shift overseas to lessen their dependence on the U.S. With the U.S. economy faltering, U.S. chemical companies will be leaning harder on their overseas operations.
As providers of America's building-block materials, chemical companies are a bellwether industry, and slumping sales in housing and autos have been deflating chemical and plastic sales for several quarters. If the economy sinks into a recession this year, the U.S. operations of chemical makers could become a bigger drag on earnings.
High prices for oil and natural gas, basic raw materials for chemicals and plastics, have added to the squeeze on profit since those costs couldn't be passed along to clients in the slumping economy.
"Whichever way you cut it, we are going to see some sort of a slowdown," says Hassan Ahmed, an analyst with HSBC Securities Inc. "What then becomes more important is non-U.S. exposure." Shares in most chemical companies have been trading down in the past year, with the stock of companies most dependent on U.S. sales hurting the worst.
DuPont Co., due to report fourth-quarter results today, said earlier this month that its 2007 earnings will be higher than it had expected. It said sales from its global agriculture business and other operations in developing international markets will help offset weakness in the U.S.
In the third quarter, U.S. sales made up $2.4 billion of DuPont's $6.7 billion in total sales.
Celanese Corp., Dallas, raised its outlook for 2007, partly on strong business in Europe and Asia. Paint and chemical firm PPG Industries Inc., which reported earnings last week, beat the drooping housing market in the U.S. with double-digit sales growth in Asia and Latin America.
Analysts have a dimming view of companies that rely on the U.S. for the bulk of their sales. Companies like Georgia Gulf Corp. and Westlake Chemical Corp. are likely to post weak results in the fourth quarter and this year because of exposure to the U.S. housing market as rising product supplies push prices down, HSBC's Mr. Ahmed said. He said he expects Georgia Gulf to post a fourth-quarter loss and Westlake to record lower profit for 2007. Georgia Gulf's stock fell more than 60% last year, while Westlake's fell about 40%.
Most chemical companies have been building plants and opening offices abroad for decades. But overseas investment kicked into high gear at the beginning of this decade as natural-gas prices shot up and companies like DuPont and Dow Chemical Co. followed their customers -- manufacturers -- to developing countries where operating costs were lower. Those low-cost locations have become major markets, spurring more investment to serve a growing customer base. By the third quarter, the international share of DuPont's world-wide sales had jumped to 64%, compared with 55% in 2003. Dow's international revenue now accounts for about 65% of its total sales, up from 57% in 2001.
The push for international expansion is accelerating as the U.S. economy stumbles. As U.S. car makers struggle, Dow is stepping up efforts to get more business from their Japanese rivals. Last year, Dow moved the head of its auto division from Michigan to Japan and opened a research-and-development center there. In Eastern Europe, Dow is trying to increase its sales in construction and has opened a plant near Moscow to supply insulation products in Russia, Belarus, Kazakhstan and Ukraine.
DuPont also is building its business in Eastern Europe. Last year, it opened new offices in Serbia and Bulgaria. In India, it launched a printing center to promote products and train clients. And in China, it formed a joint-venture with a local biotech firm to research genes in plant seeds.
For Celanese, growth is in Asia. Last year it started a plant in China to make a chemical used in food sweeteners, textiles and paints. That should boost the company's fourth-quarter profit, due for release Feb. 5. Celanese predicts half of its profit will come from Asia by 2010, up from about one-third currently.
Companies that place big bets abroad run the risk that a recession in the U.S. will spread. But even accounting for that, business in the rest of the world this year is likely to be much more brisk than in the U.S., analysts say.
