Dow, ExxonMobil Find Higher Energy Prices Cutting into Chemical Profits

acs.yellowbrix.com Source: Houston Chronicle Publication date: 2003-01-31

Jan. 31--Two big chemical companies showed how their profit margins are being squeezed by higher energy prices.

Chemical makers shared a common problem -- the price of the natural gas and oil they use has surged -- forcing them to raise prices and cut costs as they struggle to come out of a long slump.

Dow Chemical Co. reported Thursday it saw a 35 percent rise in the price of feedstock and energy costs, from a year earlier. But prices of the products it sells only rose by about 6 percent.

Midland, Mich.-based Dow announced a fourth-quarter loss of $809 million. However the worst of the loss was due to a $828 million charge to set aside money to cover an increase in its expected asbestos liabilities.

Also Thursday Lyondell Chemical Co. of Houston announced a fourth-quarter net loss of $93 million, a reversal in fortunes from the third quarter when its net loss was only $2 million.

For the year it reported a loss of $148 million, little changed from the 2001 net loss of $150 million.

Exxon Mobil Corp. also reported a drop in its chemical business. The profit on its chemicals business fell by almost two-thirds to $76 million because of higher costs for oil and natural gas which are used for both feedstocks and to power the plants.

While Lyondell's performance improved mid-year, it fell back due to a confluence of events, the company said in a written statement.

These events include the yearlong climb in energy costs and the oil industry strike in Venezuela, which affected its refining joint venture with Citgo, which is owned by the Venezuelan national oil company. Natural gas prices have gone up as this cold winter cut deeply into inventories.

Both companies complain about the rising prices for crude oil and natural gas, and are compensating by raising the prices of the products they sell.

Lyondell feels pretty good about its prospects. "I think we will get a substantial increase, but not necessarily every penny," said President and Chief Executive Officer Dan F. Smith. "There seems to be more of a general push than is typical in these businesses."

Lyondell has announced price increases across virtually the entire product line, although there remains room for some negotiations with customers.

To analyst Andrew Cash of UBS Warburg in New York, the chemicals industry is caught in a confluence of negative events and basically is still "bouncing along on the bottom."

The pressure for Dow Chemical, whose biggest operation is in Freeport, has been getting more intense of late.

Dow expects its cost for feedstocks and energy to be about $400 million higher in the first quarter than in the fourth. Compared to the first quarter of 2001, this cost increase may be a whopping $1 billion, said President and Chief Executive Officer William Stavropoulos in a conference call with analysts

It isn't waiting for an industrywide comeback to restore its bottom line.

It's tightening its operations, which will include sales of some operations and shutdowns of others, are will likely lead to 3,000 to 4,000 job reductions before the year is out. On Thursday it announced plans to close ethylene crackers that are part of its complexes in Texas City and Seadrift.

While times are tough now, the economy is growing and there are some signs of hope in this complex business.

For the quarter, Dow said its sales were up 9 percent from a year earlier to $6.9 billion, the result of a 6 percent higher price and 3 percent greater volume.

Some products look promising, such as styrene, which already is in fairly tight supply, Cash said. This tightness should help with prices.

There was an industrywide price increase for polyethylene, 5 cents per pound, announced last July but not actually implemented until Jan. 1. An additional increase of 6 cents per pound has been announced for Feb. 1.

Polyethylene rose 5 cents per pound industrywide, which went into effect Jan. 1. Another increase of 6 cents per pound will take effect Saturday.

The markets are expected to firm for some products as early as March, Lyondell believes. Its Equistar venture announced price increases across basically the entire polymer lineup.

Chemical makers may also get some significant relief on the cost side. Production is slowing rising in Venezuela, and some end to the standoff with Iraq could reduce the price premium due to fears that war would cut off exports.

"If these events occur, our operations should benefit from a rebound similar to what we saw in the second quarter of last year," said Smith.

Cash, the analyst, sees the chemical industry holding onto a portion of those better profit margins for a while, "to make up for some of the hurt" it is experiencing now.

In the meantime, dealing with tight supplies has been a trick.

Lyondell has done a masterful job of finding crude oil for its Lyondell-Citgo refining venture, said the analyst. The operation, which was set up to refine Venezuelan crude, is back to full operation after scaling back for a time due to shortages of crude.

It has also cut back because on capacity.

Lyondell last year mothballed an ethylene plant in Lake Charles, La., with about 800 million pounds capacity, which it Thursday characterized as being in deep sleep.

Lyondell's $93 million net loss for the quarter is equals to 58 cents per share, compared with the year earlier's net loss of $53 million or 46 cents per share. Sales were $2.4 billion against $1.56 billion a year earlier.

Its net loss of $148 million for the year is equal to $1.10 per share and compares with the prior years $150 million loss, equal to $1.28 per share. Sales were $8.17 billion against $7.66 billion in 2001.

Dow's announcement Thursday of closing two Union Carbine ethylene crackers will eliminate 2.5 billion pounds in capacity, which Cash says is 1 percent of world capacity.

It said it was getting rid of operations which were under-utilized or non-competitive.

The Texas City cracker will be shut down by mid-year and the Seadrift cracker by year's end. Both are parts of much larger facilities that will continue, said Dow spokeswoman Cindy Newman.

Dow has identified various facilities with a book value of $100 million for either closure or consolidation, it said, and beyond that is studying assets representing several hundred million dollars more.

Additionally, it has identified assets with 2002 revenues of approximately $1.5 billion which are candidates for sale or swap.

To see more of the Houston Chronicle, or to subscribe to the newspaper, go to www.HoustonChronicle.com