European Chemicals
Demand decline to dominate earnings trajectory. Stay
on the defensive.
European Chemicals
Neil C TylerAC
(44-20) 7325-9935
neil.c.tyler@jpmorgan.com
Marcus Diebel
(44-20) 7325-9424
marcus.x.diebel@jpmorgan.com
Heidi Vesterinen
(44-20) 7325-4537
heidi.m.vesterinen@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 76 for analyst certification and important disclosures, including non-US analyst disclosures.
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• Sharp volume contraction to dominate earnings trajectory. Collapsing
demand in a number of key end markets will, we estimate, trigger average
volume losses in FY2009 of 6.3% across the sector. We expect most of this
contraction will be felt in the first half of the year, with those most exposed
losing between 8% and 10% of volumes during ’09. Based on our coststructure
models, we calculate this volume loss alone could reduce YoY
operating profit by up to 45% across the sector.
• Falling operating rates to prevent any meaningful benefit from input
cost deflation. We believe the cumulative effect of falling operating rates
will progressively weaken pricing power, and prevent companies from
deriving any meaningful margin benefit from collapsing raw material costs.
Given the rate of demand decline, and historical sector track record of weak
pricing, there remains a risk that selling prices will fall more quickly than
input costs, adding to margin pressure.
• Some consolation from higher cash conversion of operating profit. The
sharp fall in sales and inventory values should benefit working capital, while
reduced capex levels should further contribute to cash flows. On the whole,
we estimate that these positives will broadly offset the loss of operating cash
flows.
• Avoid earnings land-mines. Prefer Agriculture and defensive growth.
We have cut our 2009 and 2010 earnings forecasts by an average of 24%
and 26% across the sector (excl. Ag & Ind gases, updated recently) (see
Table 3 on page 7) and are now up to 50% below consensus. We have
lowered our target prices across the universe. Given potential further
earnings risk from progressive price-erosion, we reiterate our Underweight
recommendations on those most exposed (Akzo Nobel, Clariant, Rhodia,
Wacker, DSM). Our top picks remain Croda, Yara and Syngenta. For those
investors seeking exposure to well-capitalised early-cycle recovery plays, we
would highlight Umicore, BASF and Lanxess.

Table of Contents
Executive Summary .................................................................4
Valuation: Value hunters beware ............................................6
Lowering earnings estimates to reflect demand collapse.............................................6
Consensus estimates present significant downside risk ...............................................8
Historical trough valuations should be treated with caution ......................................11
Volume decline to dominate ’09 earnings. ...........................14
Significant operational gearing across the sector.......................................................19
Pricing - Lower operating rates likely cumulatively to
reduce pricing power .............................................................22
Raw material benefit likely overshadowed by falling
volumes and weakening pricing ...........................................23
FCF conversion should improve...........................................27
However, cash ‘windfalls’ will likely be directed towards costly restructuring ........28
Company section....................................................................31
Air Liquide.................................................................................................................33
Akzo Nobel................................................................................................................35
BASF .........................................................................................................................37
Bayer..........................................................................................................................39
Ciba...........................................................................................................................41
Clariant ......................................................................................................................43
Croda..........................................................................................................................45
DSM...........................................................................................................................47
K+S............................................................................................................................49
Lanxess ......................................................................................................................51
Linde..........................................................................................................................53
JMAT.........................................................................................................................55
Rhodia........................................................................................................................57
Syngenta ....................................................................................................................59
Umicore .....................................................................................................................61
Wacker.......................................................................................................................63
Yara...........................................................................................................................65
Appendices .............................................................................67
Appendix I: Raw Material Prices...............................................................................67
Appendix II – Summary company financial data.......................................................68