Chemical monitor - October 2003

Profit margins in the chemical sector have fluctuated markedly since the beginning of 2003, but have improved significantly recently. This was mainly due to a sharp fall in production costs and fuel prices, but selling prices for certain chemicals have also been holding well in this period.

In July 2003, margins improved by an average of 0.7%, having been nearly static in the previous month. Moreover, they rose by 1.1% compared with a year ago - an encouraging trend as many chemical companies have seen their margins hard pressed in recent years.

During July, production costs for the chemical sector dropped by 0.5% compared with a fall of 0.1% the previous month. Moreover, the cost index was up by only 0.7% compared with a year ago, which was one of the lowest increases in recent years. Some fuel costs have fallen while certain imported products were also lower, including imported chemicals which fell by 1.3% recently.

Pharmaceutical costs dropped by 0.4% in July, following a rise of 0.3% the previous month. On an annual basis, pharmaceutical costs have risen by an average of 1.2%. The decline for intermediate products was quite pronounced, with a drop of 0.7% following a fall of 0.3% in June. On a longer term basis, intermediate costs have risen by 1.1% compared with a year ago.

Movements in selling prices have been variable: they rose by 0.2% in July having been static the previous month, but have gone up by 2.8% compared with the corresponding period last year. Pharmaceutical prices have been stable for some time and went up by only 0.5% compared with a year ago. Intermediate product prices rose by 0.4% in July as against a rise of 0.1% in June. The underlying trend has also slowed down, though prices for intermediates chemicals were 4.4% higher than a year ago.

For many chemical companies, the increase in margins is a welcome development, though this trend may be short-lived. Evidently, competition in the chemical industry is still quite intense and the scope for price rises is limited for the time being. Moreover, the fall in production costs may not continue for much longer, so that chemical companies will have to watch their margins carefully in the future.