Chemical plants endure Rita, could see profits cut
Mon Sep 26, 2005 03:12 PM ET By David Brinkerhoff
NEW YORK, Sept 26 (Reuters) - U.S. chemical plants escaped Hurricane Rita with little structural damage, but the industry could face disappointing third-quarter results because of lost production time and restart costs, analysts said on the Monday following the storm.
While roofs, pipes and vats remain intact, the precautionary plant shutdowns ahead of Rita and its bigger sister Katrina have disrupted chemical output along the Gulf of Mexico, home to about 70 percent of a U.S. ethylene production. Ethylene is a key component of most plastics and serves as a building block for many chemicals.
"Chemical producers will limp toward the finish line of the third quarter with idle plants, which bodes ill for third-quarter earnings," said Kevin McCarthy, chemical analyst with Banc of America Securities.
Top producers like Dow Chemical Co. and DuPont Co. idled dozens of chemical facilities. The two companies reported no significant structural damage this weekend after Hurricane Rita made landfall on the Gulf Coast.
Even so, both Rita and Katrina caused indirect harm by disrupting shipping lines, natural gas supplies and customers.
Dow's shutdowns included Freeport, Texas, a massive plant which accounts for 5 percent of North American's ethylene production capacity.
Some producers have already warned of lower third-quarter earnings.
Cytec Industries Inc., which makes chemicals used in aerospace, plastics and water treatment, said Katrina's disruption of energy and raw material supplies would wipe 14 to 16 cents off earnings per share due to production lost at a facility near New Orleans. It is also blaming the warning on recent price hikes for oil and natural gas, key ingredients for chemicals.
Even though Cytec is trying to offset those losses by raising product prices, analyst Laurence Alexander of Jefferies & Co. is lowering his third-quarter forecast on the company by 13 percent, "to reflect both the direct impact from Hurricane Katrina as well as the indirect impact of higher raw material and energy costs."
He is also trimming his fourth-quarter outlook and cutting his forecast for the first half of 2006 in anticipation of further cost increases.
Those costs pose a "severe threat" to the industry in the aftermath of the storms, according to Dow Chemical.
"The supply of fuel gas and raw materials, and transportation logistics around the Gulf of Mexico -- already significantly impacted as a consequence of Hurricane Katrina ... are expected to present a continuing challenge to industry throughout the region," Dow said.
The harm to near-term output, however, offers the possibility of some chemical prices rising, eventually helping the bottom line of chemical makers.
"(The fourth-quarter) now looks far better than the hurricane-decimated Q3," said Deutsche Bank analyst David Begleiter said last week.
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