Mr. Roberts: The chemical sector is broadly divided into two categories: the so-called specialty chemical companies, and then essentially all other, which we’ve affectionately called major chemicals. I think, historically, the major chemicals were associated more with basic or commodity chemicals. But, over time, there has been a shift of the entire industry away from the commodity, particularly the petroleum intensive chemicals, and toward what have been called specialty chemicals. So the historical segmentation is losing a little bit of its meaning. That’s because many of the specialty chemicals have matured. They’ve gotten larger over time. Their industries have become a little bit more commoditized themselves, so the earnings of many of the historical specialty chemical companies have turned down during an economic downturn. Some of them have gotten to breakeven or close to losses. And, many of the historically more commodity companies, like DuPont (DD) and Rohm and Haas (ROH), today are, I would say, as specialty as many of the specialty companies, as they have shed their commodity businesses and acquired some of the specialty companies. So, while we still maintain two areas of coverage, specialty versus majors, I would say that there’s quite a bit of overlap these days between the two groups.
TWST: When we last spoke in September 2000 you indicated that in your opinion we were coming up to the dawn of a recovery in the chemical stocks. How has the group performed over the past six months?
Mr. Roberts: It has been roughly flat over the past six months. They bottomed late last year and then had a rally off of their bottom into the early part of this year. But I would call this noise along the bottom. The group as a sector peaked relative to the S&P 500 back in the mid-1990s, and for some of the stocks back in 1994. So they’ve been bouncing along the bottom, I would say, for about the last three years or so. We are statistically in one of the longest downturns for the stocks that we’ve had in several cycles as a group here, so our bias is to try to be a little bit positive still. But the recovery, I think, has been pushed out since our last conversation. That’s primarily due to two factors: first, the slowing economic activity that we’ve had, particularly here in the US; and second, I don’t think a year ago we thought that energy prices would squeeze the chemical sector as tightly as they have.
Tickers included in this excerpt: APD, DD, DOW, EC, EMN, FMC, HPC, JMPLY, MMM, MON, OLN, PGI, PX, ROH
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