NEW YORK - U.S. chemical makers are poised to post stronger-than-expected third-quarter earnings, but demand for their products could cool later this year as government stimulus programs unwind, industry experts say.
The chemicals industry -- which makes the base products that go into thousands of everyday items like electronics, automobiles and clothing -- is expected to show a strong uptick in earnings.
But major stock moves, which often immediately follow big earnings beats or misses, might be in short supply this quarter as investors look for solid evidence that the economy has begun to right itself and demand for chemicals has returned.
Data from heavyweights like Dow Chemical, DuPont and Ashland will be important indications about the health of the rest of the U.S. economy.
The third quarter is going to look good -- probably a lot better than most people expect, Greenwich Consultants analyst Mike Judd told Reuters.
Government programs, like the so-called Cash for Clunkers autos program and a first-time home buyer's rebate, boosted business in the sector during the June-to-September period, industry observers say.
Other positive indicators include low energy costs -- especially for the important feedstock natural gas -- and a steady improvement in railcar loadings, the most popular way to ship chemicals.
Many of the industry's largest players have also been able to launch successful debt or equity offerings to finance acquisitions or repay debt.
Going forward, the question is whether or not those gains can be sustained. Cash-for-clunkers is over, the home buyer's credit is expiring in December and the winter is cyclically the worst time for chemical makers.
The clunkers program depleted carmakers' vehicle inventory, so they will have to ramp up production for a bit. But, eventually that increase will taper off if demand is not sustained.
I think we'll see good activity (in the chemical sector) through the end of November, Deutsche Bank analyst David Begleiter told Reuters. But December looks uncertain right now.
For investors unsure about what to do right now, Greenwich Consultants' Judd sees a clear path:
Why wouldn't you want to sell on the good news, and then wait to see what happens?
ONE STEP AT A TIME
While many chemical makers were able to report second-quarter profits largely due to draconian cost cutting, investors and analysts are keen this time to see income generated from actual sales.
In a good sign for returning demand, many of the industry's customers are drawing down stockpiles, said Standard & Poor's analyst Kyle Loughlin.
That's an indication the destocking trend has played itself out, said Loughlin. You're getting the fundamentals of the economy coming through.
DuPont, which is set to report Oct. 20, reorganized its business during the third quarter to give regional leaders more authority and -- it hopes -- boost long-term profit.
Shares of the Wilmington, Delaware-based company rose 25 percent in the third quarter.
Dow Chemical recently payed off a loan it used to buy Rohm & Haas last spring. The Midland, Michigan-based company has been folding Rohm's assets into its own, hoping in time its specialty product base boosts results.
Dow, whose stock rose 62 percent in the third quarter, is scheduled to reports results on Oct. 22.
Ashland is also trying to integrate new operations after its buyout last fall of Hercules Inc.
The Covington, Kentucky-based company's stock rose 54 percent in the third quarter. It plans to report results on Oct 28.
Elsewhere in the sector, Air Products and Chemicals is set to report on Oct. 21. PPG Industries plans to release on Oct. 22, Eastman Chemical is set to post on Oct. 22 and Lubrizol plans to post results on Oct. 29. (Reporting by Ernest Scheyder; editing by Patrick Fitzgibbons and Tim Dobbyn)