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Chemical Sector Mixed Amid Uncertainty
Thursday September 8, 4:54 pm ET

Chemical Sector Sees Mixed Trading Amid Uncertainty Over Hurricane Katrina's Effects

NEW YORK (AP) -- Days after Hurricane Katrina sunk the nation's gasoline supplies and buoyed energy prices, investors Thursday allowed shares of major chemical companies -- whose livelihoods are largely linked to natural gas and petroleum prices -- to ebb in mixed trading, as uncertainty remained over how the storm would affect profits.

The Dow Jones U.S. Chemical Index was down 49 cents, or 0.25 percent, in late trading Thursday, following a flurry of mixed analyst reports this week over how chemical makers stand to fare in the aftermath.

Over 25 percent of U.S. crude oil production was initially affected by Hurricane Katrina, and up to 15 percent of the nation's refinery capacity was shut down for the first few days, cutting gasoline production by about 10 percent. The disruptions sent gasoline prices skyward.

On Wednesday, Banc of America Securities analyst Kevin W. McCarthy cut his earnings expectations and price targets of some of the biggest chemical companies, including Dow Chemical Co., which has a big presence in Louisiana, and DuPont Co., which had to shut down several plants because of the storm. McCarthy said higher energy costs pose an immediate challenge to third-quarter earnings in the industry and could cause industrial production to slow down, reducing demand for chemicals down the road.

Dow Chemical shares, however, were little changed Thursday, trading up 7 cents to close at $44.67 on the New York Stock Exchange. DuPont shares closed down 18 cents at $39.60 on the Big Board.

The mixed trading coincides with disagreement among industry observers over just how much Hurricane Katrina will hurt the sector's performance. Credit Suisse First Boston analyst William R. Young on Tuesday said producers of basic petrochemicals, plastics and chlor-alkali products will probably show a "healthy progression" in margins amid elevated oil and gas prices.

"Should the bulk of hurricane Katrina-related problems associated with oil/gas/refined products availability be largely over within the next four to five weeks and the U.S. economy escape a recession, we don't believe there will be a massive inventory build followed by a bust," Young said in a note to investors.

Chemical companies are highly sensitive to energy costs because petroleum and natural gas are the raw materials for many of their products. In addition, overly high energy costs can curb production by manufacturers, reducing demand for chemicals.

Frank Mitsch, an analyst with Fulcrum Global Partners LLC, said in a report Thursday that Katrina will probably only hurt chemical companies in the near-term. "In the coming weeks, logistics issues, specifically rail outages and delays, will make it difficult for producers to resume normal operations," Mitsch said in the note. "However, the long-term impact is positive as the reduction in production capacity will further tighten the supply/demand balance and help producers push through price increases."

Source: Associated Press

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