Chemical Companies' Outlook: Who's Right?

by: Judy Weil

Bloomberg reported Monday that Apollo Management and chemical-maker Huntsman Corp. (NYSE:HUN) came to an agreement on their failed merger. Apollo agreed to pay Huntsman $1 billion to terminate the $6.5 billion deal. Some analysts thought the settlement was too little, and wondered whether Huntsman was struggling financially and needed the money asap.

It certainly doesn’t seem to be a very good time for chemical-makers out there. The NY Times reported last week that E.I. DuPont de Nemours (NYSE:DD) would cut 2,500 jobs and eliminate 4,000 contractors. It will idle 100 manufacturing plants and doesn’t expect any Q4 profits because of the construction and automotive markets.

Dow Chemical (NYSE:DOW) is restructuring and streamlining its business, letting go of workers and idling plants. It too is tied to the automotive industry and the effects of any potential bailout—or not—loom in the background. The company has stated it won’t cut its dividend. On its Transformational Strategy call last week, Dow outlined its moves for this difficult market:

Now as a result of moving to this structure… we can proceed to eliminate approximately 5,000 full-time jobs which is about 11% of Dow’s current workforce.

We’re also closing 20 production plants in high cost areas and divesting several non-strategic businesses. The vast majority of these businesses were already part of Dow’s business portfolio optimization group and were targeted for action. Today’s announcement means we’ll pursue these closures and divestitures at an even more aggressive pace than we have in the past. I should point out that about 2,000 roles of the total jobs being eliminated are expected to go with these divested businesses.

We are also in the process of temporarily idling approximately 180 production plants. These represent approximately 30% of our plants worldwide and are mostly split evenly between North America and Europe. As a result we will also be reducing our contractor workforce by about 6,000.

A difficult quarter, and Dow is expecting to take a $700 million hit from the restructuring moves:

What we were seeing in September and October, and October was really precipitous and November was pretty bad but at the kind of October run rates, was a deterioration really pretty much across the board. So the 30% idling, the 180 plants, I would tell you it is across the board. It’s not centered on one particular geographic area or one value chain.

When asked why management won’t cut the dividend:

Both our earnings expectations for next year as well as our cash flow expectations for next year will exceed the requirements for the dividend payment.

CEO Peter Huntsman however, was upbeat to Bloomberg's. He said the $1B settlement was remarkable in this market, and provided a rosy outlook for next year:

Huntsman’s fourth-quarter results, excluding the settlement, probably will mark the bottom of the industry contraction, because demand is suffering from weak end markets as well as customers’ decisions to use up inventories, Peter Huntsman said. First-quarter sales should improve from the current period, with “genuine” demand gains possible in the second half, he said.

Huntsman also will benefit next year from lower costs for petroleum-derived raw materials, such as ethylene and benzene, he said. Huntsman each year buys 200 million gallons of benzene, the price of which has dropped from about $4.80 a gallon to about $1 in less than two months, he said.

Hopefully that is not just wishful thinking.