DSM could be ‘severely tested’ on vitamin E pricing early next year: analyst

By Jane Byrne contact

- Last updated on GMT

DSM could be ‘severely tested’ on vitamin E pricing early next year

Related tags: Investment, Nutrition

DSM posted a volume hike on the animal nutrition side in its Q3 2014 results but an analyst forecasts increasing challenges linked to vitamin E pricing for that division and the DSM business overall.

The vitamin maker reported net sales of €527 million ($659m) for its animal nutrition and health division, which was a jump of 2% on Q2.  It said organic sales growth was 4% driven by higher global volumes and strong performance from the premix businesses.

The company’s overall earnings before interest, taxes, depreciation and amortization (EBITA) fell 8% to €315m, meeting analysts’ estimates. Quarterly sales rose 1% to €2.32bn, and its stock went 3.1% higher in Amsterdam this morning.

Pricing pressure, particularly in vitamin E, intensified in the latter part of the Q3. But DSM said the impact of the significantly lower spot prices for that additive was still limited. 

Chinese aggression

However, ABN AMRO analyst, Mutlu Gundogan, ​says the Dutch company, if somewhat shielded right now from vitamin E spot price volatility, “could be severely tested”​ in Q1 2015 due to an aggressive strategy by Chinese players.

“Vitamin E manufacturing capacity from current Chinese producers has increased, and the risk of a new entrant onto the market remains.  

Additionally, some Chinese vitamin E suppliers are in a race to the bottom on prices, with a few, it seems, willing to be loss making operations in the short term in order gain market share.  

If the current lower pricing trend on that vitamin continues, and I think it is likely to, DSM’s overall profitability in 2015 could be hit, with a potential loss of €15 to 20 million per quarter,”​ Gundogan told us. 

And he said the developments around vitamin pricing show DSM’s portfolio is becoming increasingly commoditized.  

DSM looks set to compete on price

But the analyst says the group is reacting to market forces. “DSM would appear to have acknowledged the need to compete with other vitamin E producers on price instead of focusing on value and relying on remedies such as taking production temporarily off-line,”​ said Gundogan.

Another cause of concern for the chemical firm, he reckons, could be the drift upward in grain prices, which may put pressure on meat producers and, consequently, lower demand early next year for premixes and vitamins globally.

And he said recently acquired assets such as trace mineral producer, Tortuga, are seriously under-performing. “DSM management is blaming currency fluctuations for the decline in sales at the Brazilian company but the numbers just don’t add up. The growth is well below the defined target on acquisition,” ​said Gundogan. 

Divestment strategy

DSM is challenged in other ways. Investor Third Point LLC is calling for it to be broken up, with it seeking the divestment of the entire performance-materials division.

But Chief Executive Officer, Feike Sijbesma, said DSM will not consider the sale of that part of the business for now, and management remains “firmly”​ committed to its strategy of pursuing growth across nutrition and performance plastics.

While DSM’s performance-materials division accounts for around 55% of sales, its contribution to operating profit is only 30%, compared with 70% for the nutrition business.

Gundogan said it would make sense for DSM to split the company, divest the materials units and just focus on nutrition and vitamins

“But divesting the materials units can only happen at the right price and the right conditions. It wouldn’t be wise to sell it now considering its current profitability is so low,” ​said the analyst.

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