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DSM will not raise prices to meet costs - for now

By Jess Halliday , 27-Jul-2006

DSM has said that it will not pass on rising costs to end markets straight away, despite an otherwise excellent Q2 blighted across the board by yet more increases in raw material and energy prices stemming from political tensions.

In its Q2 financial results reported today, the Dutch chemicals group said raw material costs rose by €90m and the Nutrition cluster was no exception, with all activities affected to some extent.

DSM increased prices of vitamins and carotenoids on a worldwide basis in April in a bid to compensate for the costs. The company said today that will be a delay before further cost increases experienced by the group as a whole can reasonably be passed on to customers, particularly in "a number of end markets where an increased resistance to further price increases is noticeable".

 

The areas in nutrition said to be worst hit by rising costs are the fat-soluble vitamins and carotenoid product range.

 

Despite the cost concerns, however, higher sales volumes for DSM Nutrition (since the start of the current fiscal year encompassing both the Nutritional Products, Food Specialties, and Special Products divisions) combined with lower prices won out to deliver a three per cent increase in revenue.

 

Sales of €634m, up from €615m for the same three months of 2005. Operating profit (EBIT) was up two per cent to €87m, accounting for 38 per cent of €234m overall.

 

Chairman of the board Peter Elverding was philosophical that the delicate balance might not swing in DSM's favour throughout all of the second half of 2006. He said that the delay in passing on costs may result in a Q3 result that is "lower than the high level achieved last year (€215m)". But he added: "Expectations are that the Q4 operating profit will be better again than last year", meaning that, on balance, the group should deliver full year profits exceeding the record year 2005.

 

Within the Nutrition cluster, operating profit for Nutritional Products rose due to lower fixed costs, but animal products performed slightly better than human.

 

For the second quarter running, Food Specialities remained virtually stable, in spite of phasing out its phytase tolling business. It attributed this to good manufacturing output levels and cost savings.

 

However DSM said that the gains made in these two areas were all but cancelled out by the poor performance of Special Products benzoic acid and benzaldehyde derivatives. This was said to be down to higher energy and raw material costs.

 

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