Chemical makers top forecast as agriculture shines
NEW YORK (Reuters) - Booming demand for agriculture products helped chemical companies BASF BASF.DEand Dow Chemical Co (DOW.N) record better than expected quarterly profits on Thursday.
Those companies have been forced to cut costs as sales from their other chemicals businesses suffer because demand from the auto, electronics and home building sectors has slumped amid the worst economic downturn in decades.
In announcing strong profits, Dow and BASF joined DuPont in beating Wall Street's profit forecasts, helped by the strong agriculture markets.
BASF, Dow and DuPont (DD.N) exposure to the hard-hit industries such as car companies or builders makes them particularly vulnerable to the downturn. This is exacerbated by the massive overhead costs typical for the chemical industry.
BASF said first-quarter operating profit beat forecasts despite a 58 percent drop in profits to 985 million euros (1.31 billion), as a good start to the growing season in Europe and the United States boosted its pesticides business.
"The main drivers were a stronger than expected performance in agrochemicals, as well as cost cutting measures in the chemical segments," Commerzbank Equity Research analyst Stephan Kippe said in research report.
Dow posted a surprise first-quarter profit of $24 million versus expectation of a loss and attributed it to cost cuts and the strength in the agricultural segment, which saw sales rise 10 percent from a year ago to a record $1.4 billion.
But Dow, struggling under a heavy debt burden after completing its acquisition of specialty chemical maker Rohm and Haas, said it may move to capitalize on the agriculture business by divesting it.
For a company suffering from weak demand in other chemical segment, the potential move would be painful, said analyst Annie Sorich of Morningstar.
"All the things they have on the table look pretty weak except agrosciences. So, maybe it's the obvious choice in the end," she added.
Most of DuPont first-quarter earnings came from its Agriculture unit. That was the only segment to post earnings growth out of the five major businesses of the company.
Dow's shares rallied 19 percent to $16.07 each in New York, while BASF gained 7.4 percent to 28.57 euros.
BASF and DuPont's overall outlook for the rest of 2009 remained weak given the poor economic forecasts.
BASF said demand for chemical products has declined further since the beginning of the year, which has had a substantial negative effect on business worldwide in the first quarter.
"There is currently no sign of a reversal of this trend and we do not consider temporary topping up of inventories in some regions and industries to be signs of a sustainable upturn," BASF Chairman Juergen Hambrecht said.
BASF said it will maintain strict cost and spending discipline and will continue to reduce current assets to counter this weakened.
DuPont had also said it would cut more jobs as weak economic conditions continued to constrict demand.
But Dow's Chief Executive Andrew Liveris was more positive and said there are some signs the pace of global economic decline is moderating.
"We believe the rate of decline of the key economic indicators such as industrial production and consumer spending has in fact slowed," Liveris said in a conference call.
But he cautioned the company was not counting on material improvements in economic conditions in the near term.
"I think Dow has a big incentive to present a positive light on its business because its trying to sell assets. May be BASF is more on the right track, although things in Europe appear worse than everywhere else right now," Morningstar's Sorich said.
(Reporting by Hezron Selvi; Editing by Andre Grenon)
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