A tale of two outlooks
on July 20, 2007

If you read the financial pages of your newspaper, everything sounds rosy. But if you turn to the news section, its all gloom. Both views can’t continue to exist alongside each other for ever. Whichever scenario comes out on top, will have major implications for the chemical industry. My own view is that this week’s Access deal for Lyondell will be seen, in hindsight, as marking the top. There could be storms ahead.


This week, Access Industries announced their expected deal for Lyondell. A mere $12bn, it didn’t even capture the main headline on the financial news pages. Yet two years ago, this would have seemed an extraordinary price to pay for a commodity chemical business. Shell and BASF, after all, had finally breathed a sigh of relief after selling Basell, their polymers joint venture, in 2005 to Access for €4.4bn.
Look behind the numbers, and the deal is even more extraordinary. Analysts suggest that net debt will amount to around $22bn, and will be 5.5 times current ebitda. HSBC goes further, and suggests that ‘normalised’ earnings could be just $2bn. This would double the ebitda ratio.
They may well be right. Lyondell’s US refining business should remain profitable whatever happens to the world economy, as long as Americans keep driving. But we all know that losses can occur very quickly in petrochemicals, if operating rates fall to 85% or below. And according to Thomson Financial, Lyondell actually lost money as recently as 2004.
Meanwhile the news sections of the papers are becoming steadily gloomier, with a seemingly endless parade of wars and environmental problems. Of course, one must allow for the fact that ‘bad news’ sells more newspapers than ‘good news’. Equally, ‘animal spirits’ are always the main driving force behind financial markets.
So forecasting which of these contrasting outlooks will triumph is difficult. But perhaps Michael Gordon’s column in today’s Financial Times indicates the way ahead. Gordon is chief investment officer of Fidelity International, and his view is that ‘there is a strong sense in many quarters that the party is coming to an end’.
And this comment puts him clearly in line with the downbeat view of US Federal Reserve Chairman Ben Bernanke, who told Congress this week that ‘credit concerns are spreading’ and that US sub-prime mortgage losses might total $100bn.
Its no surprise to find Bernanke’s gloomy view reported on the front news page. But the fact that Gordon’s view was reported in the financial pages, is perhaps as good an indicator as any that the mood in financial markets may be about to become less rosy.

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