After a disappointing start to 2006, U.S. chemical makers could post improved second-quarter results as customers race to stockpile everything from plastics to chlorine ahead of the summer hurricane season, experts say.
Fear of storm disruptions, along with current low stockpiles, has helped spur plastic makers and other chemical customers to revive their buying after a restrained winter.
A demand pickup in March has continued into April, Deutsche Bank analyst David Begleiter said in a recent note. Coupled with the fact that inventories are lean, prebuying is likely ahead of the hurricane season.
Hurricanes Katrina and Rita lashed the Gulf of Mexico in August and September, killing more than 1,000 people and damaging chemical companies' operations.
The storms, which were part of the busiest hurricane season on record, shut down more than 20 percent of North American production capacity of ethylene, a key ingredient for plastics and most other chemicals.
Prices for natural gas, both an ingredient in ethylene and a power source for plants, hit record highs at the time.
In late March, factories needing chemical supplies began replenishing their low inventories, motivated in part by memories of the devastating storms.
Stockpiles of plastics, fertilizers and other chemical-made goods had dwindled since late last year as customers held off on buying. They waited for the costs of natural gas and, in turn, chemicals, to ease, which they now have done with the return of warmer weather.
Now customers are jumping back into the market, which comes as a relief to companies like U.S. market leader Dow Chemical Co., which suffered from weaker demand in the first quarter.
After a slow start to the year, the pace of sales quickened toward the end of the quarter, and we're now seeing improved industry demand across many of our businesses, Chief Financial Officer Geoffery Merszei told analysts after Dow reported earnings last month.
As a result, prices for basic plastics and benchmark chemicals like ethylene are rebounding.
We see a light at the end of the ethylene tunnel, said Banc of America chemical analyst Kevin McCarthy. After four months of erosion, spot ethylene prices have risen.
Demand and prices also got a boost last week after a major fire at Huntsman Corp.'s chemical plant in Port Arthur, Texas, knocked out nearly 2 percent of North America's ethylene capacity. The damaged unit could remain shut for months.
The ripple effect was felt quickly, as Nova Chemicals Corp. idled a unit that uses ethylene, citing shortages. This helped lift spot ethylene prices, which have climbed about 13 percent since last week.
We believe there may be a rush to stock up on inventories, said Citigroup chemical analyst P.J. Juvekar.