n e w s o f t h e w e e k

CHEMICAL FIRMS POST WARNINGS Wall Street told that third-quarter earnings won't meet expectations

I f company preannouncements are any indication, the third and fourth quarters won't be pretty for the U.S.

chemical industry. A number of companies representing

most sectors of the business have told investors in advance of reporting third-quarter results later this month that profits will be below expectations. Many are warning that the fourth quarter won't be much better.

DuPont, the largest U.S.-based chemical producer, set off the downgrades in early September when it announced that full-year earnings would come in as much as 5% below analyst estimates. The company blamed a combination of high raw material costs, a weak euro versus the dollar, and some slowing in the U.S. economy.

Since then, companies from many fac­ets of the industry have come forward with earnings warnings of their own.

The specialty chemicals segment has the lion's share of apologetic firms, with Solutia, Cambrex, Lubrizol, PolyOne, Great Lakes, and A. Schulman all admit­ting to third-quarter woes. Most pointed to DuPont's three profit-robbing cul­prits, while some added their own. For example, Mark Bulriss, Great Lakes' chairman and chief executive officer, said the cool summer in the Northeast hurt his company's sales of swimming pool chemicals.

But specialties firms aren't alone. In­dustrial chemicals maker PPG Indus­tries said its third quarter would be be­low expectations, and two polyvinyl chloride producers—Georgia Gulf and Borden Chemicals & Plastics—both an­nounced that weak demand and falling prices would crimp earnings for the quarter and the year.

A few segments of the chemical busi­ness seem to be weathering the storm. Fred Siemer, an independent analyst based in Highland, N.Y., notes that in­dustrial gas makers have been success­ful in passing higher energy costs on to

customers in the form of special surcharges.

Also, a strong ethylene market has al­lowed polyethylene-oriented companies like Dow Chemical and Nova Chemicals to pass through higher feedstock prices so far. "But their game is over, too," Sie-

< y S k Great Lakes 1^57 Chemical Corporation

mer says, '"because significant ethyl­ene capacity is coming on-line and ethyl­ene is starting to weaken."

The only actual good news so far has

been from inorganic and specialty chemicals maker FMC, which said its third quarter would meet or beat expec­tations. "Like many companies, we are being hurt by rising energy prices and the translation effects of lower Europe­an currencies," Chairman and CEO Robert N. Burt said. "But we expect that the strength of our businesses, as well as cost control efforts, should allow us to overcome this weakness."

Interestingly, although the stock mar­ket has generally been punishing chemi­cal companies since DuPonf s Sept. 7 an­nouncement, for some, the financial pic­ture isn't all that bad. DuPont, for example, still expects to raise earnings by 10 to 14% this year over last, instead of the ambitious 17 to 20% it had expected. And

despite his warning, Bulriss said Great Lakes' operating earnings will have "high sin­gle-digit" growth in 2000.

In Siemer's view, the sharp reaction to only moder­ately negative news is indica­tive of a momentum-driven stock market that is down on

chemicals right now. "The chemical industry has become a pari­ah," he says. "People are acting like companies are going into the red or bankrupt, and that's not the case at all."

Michael McCoy

EU, U.S. Forestall Trade Confrontation The U.S. and the European Union have taken a step back from an escalating trade dispute, giving the U.S. more time to work out an acceptable settlement.

The deal, struck Sept. 30, concerns the Foreign Sales Corporation (FSC) law, which gives a federal tax break to U.S. exporters. The statute provides a tax exemption for a portion of the in­come generated by FSCs, which are corporate subsidiaries established by U.S. firms outside U.S. territorial limits. As part of the nation's largest exporting industry, chemical manufacturers are major users of FSCs.

The trade tiff began when the EU challenged the U.S. law, saying the FSC tax break violated international trade rules. The World Trade Organization (WTO) agreed with the EU.

WTO gave the U.S. until Oct. 1 to amend the statute to the EU's satisfac­tion. The Clinton Administration drafted legislation, now pending in Congress, to replace the FSC law. But last month, the

EU rejected the Administration's plan, saying the legislation still did not com­ply with WTO rules. Although the House of Representatives passed the legislation (H.R. 4986) on Sept. 13 and the Senate Finance Committee ap­proved it on Sept. 20, the full Senate has yet to vote on it.

Because the U.S. missed the Oct. 1 deadline, the EU, as the winning party in the trade dispute, gained the authori­ty to impose trade sanctions against the $26 billion worth of U.S. products ex­ported to the EU annually.

But the EU opted not to impose sanc­tions yet, instead hammering out a deal with the U.S. designed to prevent esca­lation of the situation. Under the agree­ment, the U.S. will first ask WTO to change the Oct. 1 deadline to Nov. 1, al­lowing time for final passage of a re­vised H.R. 4986 and signature by the President. A WTO panel will then re­view the new legislation to determine if it complies with the organization's trade

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Eizenstat (left photo) and Lamy

rules. The EU would not impose sanctions until af­ter the WTO panel issues a report.

"Our priority is to re­solve disputes, not exac­erbate them," says Pascal Lamy, the EU trade com­missioner. "We disagree on the replacement FSC system, which, in our view, remains incompati­ble with the WTO findings. We have agreed on how to handle this."

Treasury Deputy Secretary Stuart Ei­zenstat says, "We cannot emphasize strongly enough how critical it is that Congress complete action on the FSC repeal and replacement legislation as expeditiously as possible. Enactment of this legislation is in our national inter­est. It is the only way to meet our obliga­tions in the WTO and avoid an unprece­

dented and immediate confrontation with the European Union."

The American Chemistry Council, formerly the Chemical Manufacturers Association, strongly supports the FSC replacement bill. "We urge the Senate to move quickly to approve the legisla­tion and send it to the President for his signature," says Stephen Elkins, co-leader of the council's tax team.

Cheryl Hogue

Transgenic Corn Contamination Saga Continues The discovery of an unapproved geneti­cally modified corn in prepared taco shells a few weeks ago continues to re­verberate. The companies involved are taking new steps to prevent a reoccur­rence, and federal agencies are stepping up efforts to ensure the corn doesn't contaminate any other human food products.

The Department of Agriculture has decided to purchase nearly all of the corn grown this year from a variety of transgenic seed brand-named StarLink. USDA will then sell the corn to animal feedlots or ethanol producers. The corn, developed by Aventis CropScience, Re­search Triangle Park, N.C., has been ap­proved for animal feed but not human consumption because of concerns it might cause al­lergic reactions. Aventis will reimburse USDA for its net expenses in the StarLink corn buyout.

StarLink corn is engi­neered with a gene from Bacil­lus thuringiensis (Bt) to pro­duce an insecticidal protein. That protein is heat stable and resists digestion, two charac­teristics of food allergens.

After StarLink corn was de­tected in Taco Bell taco shells

in mid-September, distributor Kraft Foods initiated a massive recall, pulling about 2.8 million boxes of the product from grocery stores (C&EN, Sept. 25, page 13).

About a week later, the Food & Drug Administration confirmed the contamina­tion and on Oct. 4 issued a formal class-two recall of the taco shells. This means FDA believes that the shells pose a poten­tial, but limited, threat to human health.

The USDA buyout is aimed at keep­ing more StarLink corn from reaching the human food supply. Another pur­pose is to reassure foreign grain cus­tomers, such as Japan, that grain ship­ments will not contain StarLink corn.

Japan, the largest importer of U.S. corn, has not approved StarLink. "The StarLink corn incident sent a shock through the Japanese corn import in­dustry and raised concern about the U.S.'s ability to comply with Japan's new law," which sets a zero tolerance for the import of unapproved agricultural prod­ucts, says Ken Hobbie, president of the U.S. Grains Council, a nonprofit corpo­ration that develops export markets for grain. A U.S. government-industry team recently spent two days in Japan, reas­suring officials that StarLink corn would be kept out of U.S. exports.

Shortly before USDA's buyout deci­sion, FDA announced that it is testing more processed foods to see if they con­tain StarLink. Among the foods to be tested are breakfast cereal, corn chips, and corn flour. Genetically Engineered Food Alert, the coalition of environmen­tal groups that first detected StarLink in taco shells, has also commissioned tests of additional corn products.

Azteca Milling, Plainview, Texas, the company that supplied the flour for the Kraft taco shells, is now taking steps to keep StarLink corn out of its flour. Ac­cording to a company statement, Azteca had not been testing incoming ship­ments for the presence of modified corn. Now it will test each truckload as well as corn inventories on hand with an inexpensive test that detects the insecti­cidal protein in StarLink. "This new technology . . . is being rapidly imple­mented at all Azteca facilities," the com­pany says.

In a related matter, a federal judge has dismissed a lawsuit on biotech foods filed in 1998 by the Alliance for Bio-Integrity. The lawsuit charged that FDA's failure to issue regulations for la­beling and mandatory safety testing of genetically engineered foods violated food safety laws. FDA's policy, issued in

1992, says that transgenic foods do not differ "material­ly" from conventional foods. The judge in the case said that FDA's 1992 announcement was a "policy statement," not a regulation.

Both sides consider the lawsuit's dismissal something of a victory. Joseph Mendel-son, the attorney for the plain­tiffs, says, "This court decision means that for almost a de­cade these novel foods have gone virtually unregulated in the U.S." In contrast, Ameri-

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