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NEW YORK (ICIS)–Deteriorating consumer demand in Europe, the lack of any meaningful recovery in China because of continuing COVID lockdowns and rising interest rates and inflation driving down housing activity in the US along with logistics constraints are all conspiring to bring down Dow’s sales and earnings in Q3.
Dow now expects around $600m in lower sales and operating earnings before interest, tax, depreciation and amortisation (EBITDA) versus Wall Street consensus estimates for Q3.
This now implies Q3 sales of around $14bn and operating EBITDA of about $1.9bn, which are also down significantly from Dow’s prior guidance of $14.3bn-14.8bn for sales and $2.5bn-2.6bn in EBITDA, according to Wells Fargo analyst Michael Sison in a research note.
Fermium Research analyst Frank Mitsch took down his earnings estimates on Dow for the second time in a week, with Q3 earnings per share (EPS) now being cut from $1.50, to $1.08, 2022 EPS from $7.50, to $6.68 and 2023 EPS from $6.40, to $6.20.
“Since our [Q2] earnings call, the combination of geopolitical tensions, higher energy and feedstock costs, and record inflation have really weakened European end-market demand and consumer spending,” said Howard Ungerleider, president and chief financial officer of Dow, at the Credit Suisse Specialties & Basics Conference.
“Eurozone consumer confidence is continuing in negative territory, [the Manufacturing] PMI (purchasing managers’ index) recently contracted (below 50) and overall economic and industrial activity is slowing significantly,” he added.
The US is faring better with resilient economic activity, but high inflation and logistics constraints are driving Manufacturing PMI lower while rising interest rates are pressuring housing starts, he noted.
In China, “recovery has yet to occur really due to their COVID policies” while industrial production and retail sales growth are slowing, and the manufacturing PMI is also showing contraction, said the CFO.
In Asia Pacific, industry cash margins are essentially breakeven levels or negative in monoethylene glycol (MEG), siloxanes and ethylene, he pointed out.
In a 24 August letter to customers, Dow said it is cutting PE operating rates across its asset base, temporarily lowering global nameplate capacity by 15%. It cited continued global logistics constraints, including port and rail congestion in the US Gulf Coast, as well as “dynamic conditions in Europe”.
“We’ve trimmed back operating rates to align production with supply chain and logistics constraints as well as demand, and we’re seeing that across the industry as well. We’ve now seen three dozen producers in Asia and Europe cutting back rates,” said Ungerleider.
EUROPE ENERGY CRISIS PLANS In Europe, Dow is working to reduce natural gas consumption, having already reduced usage by about 15% by “optimising every layer of feedstock in every furnace”, said the CFO, who also pointed out that Dow’s cracker footprint in Europe is diverse, with its largest integrated facility is in Terneuzen, the Netherlands, the second largest in Tarragona, Spain and the third in Boehlen, Germany.
“About 50% of our entire European footprint on natural gas is structurally hedged so we’re going to get pain, we’re definitely seeing margin compression because of the higher energy costs and the demand destruction that’s happening, but on a relative basis… we should be able to outperform,” said Ungerleider.
“If there’s further load shedding, it likely happens in Germany before it happens anywhere else. We have the load shedding plans, we’re looking at further abilities to optimise by using recycled gas, and coming up with other creative plans,” he added.
Dow views the greater threat in Europe coming from demand destruction than the availability of gas but is preparing for both scenarios, he said.
US LOGISTICS OUTLOOK Meanwhile, logistics constraints in the US, especially on the US Gulf Coast will likely linger through the rest of the year. However, Dow is finding ways to boost its exports, he noted.
“In August we were able to increase our marine packed cargo shipments out of the US by more than 15%. The teams are actively engaging on a plan to do another 10-15% over the next 30-60 days,” said Ungerleider.
“But I think that’s just something we’re going to be dealing with through the end of the year. And then you’ve got the potential for the rail strike which certainly could be a headwind for the entire industry and frankly for the US economy if that doesn’t get resolved,” he added.
Earlier at the Credit Suisse conference, Eastman Chemical CFO Willie McLain said he is “definitely concerned” about the looming potential US rail strike and the implications for the broader economy along with disruptions to its own transportation network.
Eastman also lowered its Q3 earnings guidance, which does not include any impact from the recent rail embargo or the potential for a rail worker strike.
POSITIVES AMID THE GLOOM Amid the overall earnings gloom, Dow sees selected pockets of strength as well as the potential for recovery down the road.
“At the same time, we continue to see strength in our downstream markets – markets like formulated silicone products for personal care applications, our functional polymers and wire and cable elastomers applications, as well as alkoxylates for pharma, cleaning and energy applications,” said Ungerleider.
In automotive, pent-up demand for vehicles and improvements in semiconductor availability should translate to additional volumes as constraints ease, he added.
US inflation, as in other regions, remains very elevated but may be showing signs of peaking.
“US inflation is now starting to show what I would call modest signs of improvement, at least in gasoline, which should uplift consumer sentiment and continue to drive spending although utilities, housing, food and frankly core CPI (Consumer Price Index) are remaining stubbornly high,” said Ungerleider.
And in China, interest rate cuts and eventual recovery from lockdowns are expected to be a tailwind for economic growth entering 2023, he noted.
Focus article by Joseph Chang
Thumbnail shows beads made of polyethylene. Image by Al Greenwood
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