OUTLOOK: As busy ‘warnings season’ nears end, a new reality sets in for H2 2023

NEW YORK (ICIS)–A very active earnings warnings season for the chemical industry is just about over, resulting in a big reset downwards in earnings expectations for Q2 and the rest of the year. With a new reality setting in, the industry is bracing for earnings and new guidance that is likely to be far less optimistic than at the start of the year.

• High number of Q2 and 2023 earnings warnings from a very diverse set of chemical companies
• Commodity chemicals weakness spreading to more consumer-oriented specialties
• Destocking is a key theme, particularly among specialties
• Earnings expectations reset to much lower levels for 2023
• Leading economic indicators point to more weakness in manufacturing sector

What is striking about this earnings warning season is not only the sheer number of downward profit revisions and their magnitude, but the diverse set of companies sounding the alarm – not only in commodities, but increasingly in consumer-driven specialties and even ag chemicals.

The latest warnings come from Germany-based specialty chemicals producer Evonik and US-based agricultural chemicals company FMC.

Date	Company	Shortfall
10-Jul-23	Evonik	Q2 adj EBITDA €430-450m vs €409m in Q1. 2023 revised down to €1.6-1.8bn vs prior €2.1-2.4bn
10-Jul-23	FMC	Q2 adj EBITDA $185-190m vs prior estimate $350-370m. 2023 revised down to $1.3-1.4bn vs prior $1.50-1.56bn
7-Jul-23	Clariant*	Q2 adj EBITDA CHF127.5-137.5m vs Q1 CHF 191m. 2023 revised down to CHF625-675m vs prior CHF780m
28-Jun-23	Ashland	Fiscal Q3 adj EBITDA $130-135m – 20% below consensus. 2023 revised down to $500m vs prior $580-610m
20-Jun-23	Olin	Q2 EBITDA $350-360m vs $417m consensus
19-Jun-23	LANXESS	Q2 adj EBITDA €100m vs prior estimate €189m. 2023 revised down to €600-650m vs prior €850-950m
15-Jun-23	Cabot	Fiscal Q3 EBIT ‘only modestly higher’ vs Q2. Will miss fiscal 2023 EPS target of $6.10-6.50. No new range given
9-Jun-23	Croda	2023 profit before tax expected at £370-400m as first 5 months at £143m lower than expected
8-Jun-23	LyondellBasell	Q2 earnings to be weaker vs Q1, no specific range
1-Jun-23	Dow	Q2 sales forecast cut to $11.0-11.5bn vs prior $11.75-$12.25bn. Earnings guidance maintained
* Shortfall calculated by ICIS based on adjusting EBITDA and targeted margin and sales for 2023

WARNING FROM A VERY DIVERSE EVONIK
Evonik on 10 July announced that Q2 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of €430-450m would come in “only slightly better” than the €409m in Q1 on the “lack of an economic recovery”. Full year adjusted EBITDA is now expected to be in the range of €1.6-1.8bn versus its prior estimate of €2.1-2.4bn.

“We haven’t seen such persistently weak sales volumes in a long time, perhaps never before over such a long period,” said CEO Christian Kullmann.

The company cited Q2 demand being “very weak across all end markets” and continued customer destocking.

Destocking has been a key theme, particularly on the specialty chemicals side. The destocking that started with commodities is now rolling to wider sectors as commodity destocking itself potentially nears an end.

Evonik serves a very diverse set of markets, from agriculture to automotive and machinery, coatings, construction, electronics, food and beverage, personal care, metals and mining, oil and gas, water treatment, plastics and rubber, and pulp and paper, among others.

In response, the company will curb costs, including by not filling vacant positions, and cut 2023 capital expenditures (capex) to around €850m. At the start of the year, the company already cut capex from €975m to €900m.

FMC SHOCKER
The profit warning on the same day from FMC came as more of a shocker as it highlighted significant weakness in the agricultural segment. The company cited “abrupt and unprecedented reductions in channel inventory by customers in North America, Latin America and EMEA” which started in late May.

FMC now expects Q2 adjusted EBITDA of $185-190m versus its prior estimate of $350-370m, and revised down 2023 EBITDA to a range of $1.3-1.4bn versus its prior forecast of $1.50-1.56bn.

FMC not only produces crop protection chemicals such as insecticides, herbicides and fungicides, but also the same types of non-crop chemicals for consumer products sold in retail outlets.

“We generally wouldn’t be shocked to see 50% level reductions in quarterly EBITDA guidance from our commodity companies, but to see it from a theoretically more stable ag chemical supplier like FMC is a surprise, and not a positive one at that,” said Fermium Research analysts Frank Mitsch and Aziza Gazieva in a research note, who called the magnitude of the warning “breath-taking”.

H2 OPTIMISM UNFOUNDED
Expectations for an H2 recovery earlier in the year, including from a China reopening rebound, have clearly been dashed. It’s this earlier optimistic outlook – and not at all backed by leading economic indicators – that is largely responsible for the downward revisions for full-year 2023.

One key leading indicator – the manufacturing Purchasing Managers’ Index (PMI) – has been pointing down for the US and Europe for months, with no recovery in sight. Meanwhile, China’s manufacturing PMI has been bouncing along the neutral level and thus not signalling any major bounce even after the post-COVID-19 reopening.

It is a different story for the services side of the economy which continues to be in expansion mode. The dichotomy is striking. It is really the services side which is holding up global economies where much of manufacturing is already in recession.

WIDENING GAP BETWEEN EUROPE CONTRACT AND SPOT
Another ominous sign for chemicals comes from Europe where there is a growing gap between contract and spot prices as the decline in spot prices has accelerated. Clearly there is more room for European contract prices to fall further.

Downstream demand destruction caused by ongoing economic woes has prompted buyers to renegotiate contractual offtakes for the remainder of the year. Some buyers are even considering procuring from the spot market instead to take advantage of cheaper prices on offer.

“The gap between spot and contract is amazing. For people who are buying on contract basis, it is really a nightmare,” said a buyer.

ICIS US LBB POINTS TO RECESSIONARY CONDITIONS AHEAD
In the US, the ICIS US Leading Business Barometer (LBB) continues to point to recessionary conditions ahead, even as the index has been showing signs of stabilisation. The US LBB in June fell 0.2% from May and was down 7.2% year on year.

“The cumulative decline in the US LBB is -9.5% from its February 2022 peak, well above the threshold 3% cumulative decline signaling recession in the past,” said Kevin Swift, senior economist for global chemicals at ICIS.

The LBB is derived from 17 forward-looking indicators related to the production of materials and other industries sensitive to cyclical swings, that have historically led the economy. It is meant to signal turning points and gauge future economic performance in the next three to nine months.

WEAKNESS COULD PERSIST
Along with overly optimistic earlier outlooks for H2, demand was clearly worse than expected in Q2 and destocking continues to be a big theme, particularly in the specialty chemicals arena.

In an analysis of aggregate volume trends among more specialty/downstream chemical companies versus more basic/upstream companies, UBS chemical analysts led by Joshua Spector pointed out “it’s interesting to note how low downstream demand appears to be”.

“Even with assumed above-trend growth in 2024 (+8-10%, in part from restocking), we just converge to only slightly above 2019 levels,” the UBS analysts said in a research note.

Given the prolonged destocking and cautious consumer buying, weakness could persist for some time, they added.

Even if destocking were to finally run its course, it will not solve the problem of underlying weak demand and overcapacity in commodity chains.

“Investors are increasingly looking for signs of the end of the destocking cycle that could lift demand, which is a new source of optimism after the enthusiasm for China stimulus has waned,” said Aleksey Yefremov, analyst at KeyBanc Capital Markets.

“We agree that the end of the destocking would be helpful, but don’t see the problem of oversupply in commodities going away in coming quarters. In other words, the end of destocking is likely not enough to lift unit margins, although would improve operating leverage somewhat,” he added.

Additional reporting by Jane Massingham

Insight article by Joseph Chang