1Q results lend weight to signs of Euro chemicals recovery

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BASF and Merck KGaA have joined DSM in reporting encouraging
first-quarter 2004 results, raising hopes further that the European
chemicals sector may be about to move into recovery mode, writes
Phil Taylor.

The news lends weight to the notion, voiced by a number of chemical executives around the end of 2003, that the sector could be bottoming out after a damaging period of weak demand, high raw materials prices and the damaging effects of a weak dollar relative to the euro.

Yesterday's news that DSM had exceeded analysts expectations with a 21 per cent hike in operating earnings that sent its shares up more than 8 per cent. And today, BASF and Merck reported their own results, both highlighting rallies in the chemicals businesses.


For BASF, operating income (earnings before interest and taxes) rose 10.2 per cent to €1.04 billion, on sales up 2.5 per cent to €9.05 billion compared to the same period of 2003, with what it described as a 'significant improvement' in the chemicals business.

And net income rose 16 per cent to €515 million, in stark contrast to the views of analysts polled by Bloomberg, who expected a median figure of €430 million.

Chemical sales were up 4.1 per cent to €1.58 billion in the face of strong demand, with the inorganics and petrochemicals clusters doing particularly well, with gains of 9.8 per cent and 5.1 per cent, respectively. Intermediate sales were flat at €462 million.

The Agricultural Products & Nutrition division, which includes BASF's fine chemicals operations and Pharma Solutions which supplies pharmaceutical ingredients and excipients, saw an 11 per cent hike in sales to €1.44 billion, while EBIT rose 5.5 per cent to €249 million. However, continued pricing pressures drove fine chemical sales down 4.5 per cent to €42 million.

Jurgen Hambrecht, BASF's chief executive, said the first three months of the year had offered "grounds for confidence."​ He added that he was optimistic about 2004, even though he expected the negative impact on the business of high and volatile raw materials costs and a relatively weak dollar to continue.


For its part, Merck said that it has started 2004 on a sound basis, after reporting a 3 per cent increase in first-quarter sales to €1.8 billion and EBIT up 2 per cent to €189 million.

The star player in the group's portfolio was liquid crystals, with sales shrugging off currency impacts to post a massive 61 per cent rise to €136 million. Chemicals overall did well, with turnover hiking 14 per cent to €474 million, although the recently-formed Life Sciences & Analytics unit - now the largest in the chemicals division, saw a slight (0.9 per cent) decline in turnover to €201 million.

The company's chief executive, Bernhard Scheuble, said that Merck now expects full-year profit after tax "to increase by a high double-digit rate compared to last year…the result of a higher operating result for chemicals and exceptional gains from the sale of VWR International and our stake in Biomer."

Merck completed the sale of VWR - its laboratory distribution business - to a US investment firm for €297 million earlier this month​ and also raised €48 million from the sale of its half stake in the BioMer orthopaedics joint venture with Biomet.

Other chemicals firms also positive

Meanwhile, some of the other European chemical majors that are not particularly active in pharmaceutical chemicals have also painted a rosier picture of the sector after reporting first-quarter results.

For example, Belgium's Solvay today reported an unexpected rise in EBIT and non-recurring items of 10 per cent to €201 million, well ahead of a Reuters analyst poll of €163 million, although sales dipped to €1.88 billion as falling prices hit its main chemicals division.

Bayer of Germany, which is gearing up to spin-out its chemicals business into a new unit called Lanxess, also said it expects to first-quarter operating profit before special items to be 25-30 per cent higher than analysts expectations when it reports next month.

And Ciba Specialty Chemicals said that there was a noticeable improvement in sales and operating income towards the end of the first quarter, although for the full period sales and operating income were both flat at SFR 1.67 billion (€1.07bn) and SFR 170 million, respectively.

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