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Chemical Industry's 2010 Outlook Mixed

Recovering demand will likely be overshadowed by new capacity coming on line.

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Chemical producers have had a wild ride in 2009. The year started off with companies facing abysmal demand and sorry prospects for profitability. However, meaningful cost-cutting, inexpensive North American natural gas, and relatively strong demand in emerging markets--particularly in Asia--have improved the picture during the course of the year. Going forward, improved cost structures should help to improve profitability, but companies will still need to deal with relatively weak near-term demand in developed countries and a wave of new supply coming on line in the Eastern Hemisphere.

Chemical makers' significant cost reductions have lowered break-even sales levels. In response to weak demand for chemicals in late 2008 and through 2009, many producers got busy mothballing and closing plants and laying off and temporarily furloughing employees. During the third quarter, chemical firms began to see the benefits of these cost-cutting measures.  BASF (BASFY),  Dow Chemical (DOW), and  PPG Industries (PPG) all saw meaningful sequential improvements in operating income. Structurally lower costs will be an important earnings driver going forward given that demand is still relatively weak--while emerging market demand has certainly been strong, developed market demand seems to be merely stabilizing at depressed levels.

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Elizabeth Collins does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.