With disappointing performances flagged up across three continents and a number of business segments, it is perhaps unsurprising that specialty chemicals outfit Elementis (ELM) is taking a hiding on the back of today's first half pre-close trading update. Shares in the £1.4 billion cap are 14.5% lower at 266.7p as the group reported falls in its US markets due to a fall-off in oil drilling projects; meanwhile, coatings suffered in China and personal care took a hit in Latin America.


Turning first to the specialty products division. This business provides functional additives used to improve the flow characteristics and performance of its customers’ products in paints and coatings, cosmetics, as well as applications in oil and gas exploration. And it's scarce demand in that latter bit that's causing all sorts of problems.

The decline in North American oil projects is not new news but the squeeze is really starting to hurt Elementis. Sales of additives into this market are expected to a show a decline of at least 30% in the first half. Elsewhere, coatings additives have been performing satisfactorily at least, barring in China, where demand is starting to come off previous levels, as evidenced in the second quarter.

This Chinese fall-off is not likely to impact overall coatings additive sales for the period but this as much down to offsetting progress being made in the North American New Martinsville facility as well as Latin American synergies from its Watercryl business.

The group's personal care business has however suffered in Latin America as a result of currency movements and some rationalisation of product lines has been implemented. That notwithstanding, Elementis thinks that positive trends in other markets and geographies mean that full year sales, on a constant currency basis should be ahead of the previous year's showing.

This is clearly not the kind of operational update that sets the world alight but it is worth bearing in mind that Elementis remains a fundamentally robust business with a sturdy balance sheet and it should be in a net cash position by year end.

Analysts at N+1 Singer are tempering their expectations: 'While the share price will no doubt be affected by today’s news, we expect the current headwinds to prove temporary,' the broker says. But 'it is clearly difficult to anticipate the timing of recovery, particularly within oilfield. We feel we have taken a prudent approach to full year 2016 and full year 2017 in assuming 5% and 4% earnings growth respectively, i.e. no quick bounce back.'

Issue Date: 24 Jun 2015