Friday, October 23, 2009

Chemical Industry Watch: Georgia Gulf (GGC), Olin (OLN) and PPG Industries (PPG)

Georgia Gulf Corporation (GGC) will be releasing Q3 financial results on Wednesday, November 4, 2009 at 5:00 p.m. ET, with a conference call the next morning at 10:00 a.m. ET. Olin (OLN) announces earnings this Monday with a conference call on Tuesday.

The pair trade has been doing well. Since Oct 2, GGC is down 29% and OLN is down only 5%. I bought more OLN after the big dive it took today, having already shorted more GGC earlier this week.

I will be very curious to see the earnings results.

Competitor PPG Industries had their Q3 conference call last week. They were weighed down by their commodity chemicals operations (the segment that competes with GGC and OLN), which suffered a 43% y-o-y decrease in sales (page 7 of investor presentation). This was the result of big price and volume declines. Year to date chemicals sales were down 32%, meaning that the commodity chemicals decline picked up in the third quarter (segment sales comparisons).

On the conference call, PPG said that they do see the electrochemical unit (ECU) pricing improving a bit so far during the fourth quarter.

GGC also amended their registration statement again. This is the fourth amendment - they already amended it two days ago. Previously I speculated that their motive for these amendments was to stall the SEC from making the registration statement effective. However, I notice that this statement has an opinion from law firm Jones Day dated yesterday (Oct 22) regarding the validity of the new shares. So maybe they were just waiting for that?

I may make the chemical industry a focus area of investing - I am planning to go through a pile of chemical industry books when I get the chance.


Tom said...

Hey CP, chemicals are highly cyclical, usually moving counter-cyclically to oil, as cheap oil lowers the price of inputs into plants. The plants themselves are these huge sunk costs, but once paid for are extremely profitably; the high wages paid are a function of the skill of operators and the sheer volume of product that moves through a continuous operation. It's amazing that they never stop 24/7 bringing in raw material and outputting product.

However, even in cheap oil times we have usually had a decent economy. The chemical industry has hardly seen a time where oil is cheap AND demand for their products is lower. How did they do during the Great Depression? That might be the best analogy.

CP said...


Thanks, those are good points. What you would say about this type of business model is that it has high operating leverage.

I am not bearish on the chemical industry per se. This trade is based on GGC and OLN being valued much differently despite their similarity.

One other thing I would note is that while oil has gotten kind of expensive, natural gas is super cheap. I think these Chlor-Alkali companies' biggest input is electricity (for electrolysis of NaCl), so they would mainly be exposed to natural gas prices.

CP said...

Here is a related section from this morning's Olin conference call:

Ed Yang – Oppenheimer & Co.

Okay. That's very helpful. And just lastly, you do sound quite a bit more optimistic on the Chlor Alkali cycle than you did in the last call, and you say that third quarter was the bottom in pricing.

How long do you think a new up turn would last? Have any past up turns lasted less than a year? Would this be a multi-year move up if we really have seen the turn? Like to get a better sense of some of the historical precedence and what your expectations are for margins and price and what peak margins and price will look in this cycle?

John McIntosh

Let me start by answering that it’s really dependent upon volume. As we look forward, we really don't have much visibility past this quarter. We are hoping that the macroeconomic trends will be in line with increased demand and increased volume for us to serve across all the market segments that we participate in.

But we're also all cognizant of the fourth quarter of last year when industry operating rates went from 85% in October to 50% in December. So, I guess, I would say that we don't expect another low point. We expect the third quarter was the low point in the industry, but for us to see a sustainable multi-year recovery is going to be driven by improvements in demand.

Joseph Rupp

I think the key point we want to make, Ed, is that we feel like we have bottomed out. We think we bottomed out, Ed, where we made a little bit of money. We think that we're still on the bottom here in the fourth quarter and we're hopeful that as we get into next year the demand picks up, but as John says we can't see that far out. We're hopeful that it does, and if it does, it will be a great move for our Chlor Alkali business.