NEW YORK, April 6: Basic material producers are poised to report dismal first-quarter results in the coming weeks, undermining a recent chorus of economists and others who have cheered signs of a recovering US economy.
Makers of chemicals, wood products, and metals — reeling from one of the most difficult business periods in recent memory — have suffered from a nearly two-year downturn in consumer demand and depressed commodity prices.
First-quarter earnings for these industries are forecast to fall 11 per cent from year-earlier levels, according to research firm Thomson Financial/First Call.
The first of the major basic industries companies to report, aluminum producer Alcoa Inc. said on Friday earnings fell 46 per cent from a year ago.
After the first quarter, pricing levels are the one silver lining for basic industries. Most commodity prices troughed in the fourth quarter of last year and this year’s first quarter, said Fred Sturm, who manages the $36 million Ivy Global Natural Resources Fund.
Price hikes on steel and certain wood and paper products, for example, have recently taken effect and are expected to stick provided a pickup in demand is not far off.
In the second half the main driver is going to be end demand and there is more uncertainty in this recovery than the typical one because it was a different kind of recession, said Chuck Hill, director of research at First Call.
Wall Street analysts’ earnings estimates for basic materials companies have stayed firm since the beginning of the year, Hill said. The same cannot be said, however, for energy companies, whose estimates have been progressively trimmed.
The steel and aluminum industries, whose prices have recovered from their lows, are feeling the positive effects of a slow and vulnerable economic recovery, said Michelle Applebaum, an analyst at Salomon Smith Barney. I do not know the impact of higher oil prices, but from a bottom-up view, volumes in the steel and aluminum sector are rising.
Oil companies will be hurt by crude prices that fell 25 per cent and natural gas prices that dropped 60 per cent from a year ago.
A warm winter, which capped heating fuel sales, will also batter the oil refining and marketing business.
The key area is refining and marketing, where it was an ugly quarter. You’re going see some losses from US oil companies in that business, said UBS Warburg’s Matthew Warburton.
The chemical sector is still waiting for signs it is on its way to a full recovery.
DuPont Co, the No. 1 US chemicals company, on Wednesday said its first-quarter earnings would top Wall Street estimates because of strong early-season sales of agriculture products and costs savings from job cuts.
DuPont’s news is reassuring, but ... agriculture alone cannot substitute for an economic recovery and we are still waiting for the follow through in demand — an increase in manufacturing and durable good orders, said David Kerans, an analyst at Argus Research.—Reuters