Chemical firms seek boost from M&A, cost cuts

By Sitaraman Shankar, European Chemicals Correspondent

FRANKFURT (Reuters) - Will acquisitions, cost cuts and restructuring be enough to maintain earnings in the global chemicals industry as demand slows and supply rises?

That will be the key question for senior executives from 10 chemical companies as well as consultants and representatives from private equity firms at the Reuters Chemicals Summit in Frankfurt on March 15-17.

"It's been easy in 2004 and 2005. This year and next will show how the industry has prepared itself for tougher times," said Christian Faitz, analyst at Dresdner Kleinwort Wasserstein.

Last year, the DJ Stoxx European Chemicals Index rose 30 percent, despite a 46 percent rise in the price of crude oil, a major source of the industry's raw materials, testimony to the strong demand for commodity or large volume chemicals.

But signs of a slowdown in the chemicals sector are visible. Earlier this month, Bayer (BAYG.DE: Quote, Profile, Research, Stock Buzz) issued a bearish forecast for its key plastics and chemicals unit, and analysts say volume growth this year is likely to be slower.

Investors also worry about new capacities in the Middle East for ethylene, a building block chemical. Prices of ethylene set the tone for prices of more complex plastics, and an oversupply would rock the boat in petrochemicals.

Analysts say European and U.S. companies will not add much by way of new capacity, but have little control over what happens elsewhere.

"Petrodollars are being put to use in the petrochemicals industry. If we didn't have Middle-Eastern capacities coming on stream, we might have seen a supercycle," said DrKW's Faitz.  Continued...