Chemical monitor: February 2006

Profitability in the chemical industry has come under considerable pressure recently. Costs have been rising sharply and most chemical firms have been unable to push up their prices in order to recoup these.

In October 2005, cost increases exceeded price movements by an average of 1.2% for leading chemical products. Furthermore, the longer-term profitability position has not been favourable, with margins being squeezed by 2.2% compared with the situation one year ago.

Production costs have continued to escalate, and increased in October by 1.1%, having risen by 0.5% in the previous month. Moreover, cost rises have been significant on an annual basis, increasing by an average of 7.3% compared with a year ago. Production costs for intermediate products advanced by 1.3% in October, as against 4.6% in September, and were 8.2% higher than in 2004. Rising costs have also been seen for pharmaceuticals, which moved up by 0.9% in October and 2.1% on an annual basis.

A major rise in fuel costs has been reported, excluding crude oil, with an advance of 6.0% in October and 25.3% on an annual basis. Crude oil prices have been fluctuating, having fallen by 4.8% in October but risen by 22% on the same period in 2004. Moreover, imported heavy chemicals were up by 0.9% in October and by 5.8% on an annual basis. A rising trend has also been seen for other imported products, including metals, which advanced by 1.7% recently.

Chemical companies have been reluctant to raise prices in view of strong competition for certain products. In fact, in October, chemical prices dropped by 0.1%, although they were up by 5.4% compared with a year earlier. Prices for intermediate products fell by 0.5% in October as against a gain of 0.6% in the previous month.

Prices of pharmaceuticals were also under pressure, dropping by 0.1% in October after falling by 0.2% in the previous four weeks. The underlying trend for pharmaceuticals has been variable and they have lost 3.5% in value compared with 2004.