Degussa hampered by material price hikes

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Degussa has blamed raw material cost increases for
lower-than-expected earnings in the second-quarter, despite
claiming that the business has"performed satisfactorily".

Earnings before interest and taxation (ebit) was nearly flat in the second quarter, rising from €254m ($314m) to €256m, while pre-tax profit fell 17 per cent to €156m.

Prices for key raw materials continue to increase. Low global stocks remain open to unexpected disruptions, and wheat and corn inventories for example are still exceptionally low.

The US government recently predicted that global wheat stocks-to-use ratio will rise by just four days to 86 days of cover in 2004/05 - the second lowest global inventory in 30 years.

In addition to the raw material situation, Degussa, the world's largest manufacturer of industrial chemicals, also said that it was restrained by increasing competition. The company ahs therefore been forced to cut prices for a number of products in order for them to remain competitive.

And in addition, the company booked an exceptional charge relating to restructuring expenses and the shutdown of a site in the UK.

Nonetheless, Degussa's chairman of the board of management remains confident that the business performed solidly given the global situation.

"Following a slow start to the year, our business developed satisfactorily in the second quarter of 2005,"​ said Professor Utz-Hellmuth Felcht.

"Demand for our products rose considerably and we were also able to increase selling prices. Sales therefore advanced perceptibly in the second quarter and EBIT was slightly higher than in the second quarter of 2004."

Indeed, sales in the quarter rose 7 per cent to €2.97bn and 6 per cent in the first half to €5.62bn. Stripping out currency effect, first-half sales rose 7 per cent, of which 4 per cent was attributable to higher volumes and 3 per cent to higher prices.

But the performance across the divisions remained mixed, as ebit increased at construction chemicals and speciality chemicals rose but fell at fine industrial chemicals, performance materials and coatings.

Degussa retained its outlook for a slight rise in sales and ebit over the full year, and remains confident that it can counter rises raw material prices.

"We anticipate that we will be able to offset the considerable rise in raw material costs by raising prices further in the second half of the year,"​ said Felcht. "Assuming a satisfactory economic trend, we still expect to report a slight rise in sales and EBIT over the full year."

The 'Degussa 2008' strategy programme was introduced in March 2005 to generate a sustained improvement in profitability. By 2008 at the latest, the company aims to achieve a substantial improvement in operating earnings and lift EBIT by €300 million compared with the end of fiscal 2004.

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