(Reuters) - Dow Chemical Co DOW.N warned of soft demand in China, raising concerns that the largest U.S. chemical maker by revenue would not be able to maintain its growth rate in the key market.
Dow’s stock fell as much as 6 percent on Thursday, reversing course from an increase in premarket trading when the company reported a better-than-expected quarterly profit due to higher margins.
“China remains a mixed bag,” Chief Executive Andrew Liveris said on a post-earnings call. “A very solid Q2 for us is not necessarily a harbinger of Q3 ...”
However, Liveris said demand from the automobiles, construction, water and food safety industries would continue to drive demand in China.
China’s economy grew an annual 7 percent in the second quarter, beating estimates. But volatile stock markets and weakness in key industries have raised concerns that growth in the world’s second-largest economy is cooling.
“Dow had a 14 percent growth rate in China, the CEO probably was implying that company won’t be able to sustain that,” UBS analyst John Roberts said. He estimated emerging markets account for about a third of Dow’s sales.
Dow’s sales fell 13.5 percent to $12.91 billion in the second quarter ended June 30, hurt by a strong dollar and weak oil prices that are eroding its competitive advantage.
Dow, like other U.S. chemical makers, has benefited from cheap U.S. shale gas, which is stripped down into ethane to make ethylene – a key component of plastics and many chemicals.
This cheap fuel had given Dow a cost advantage over its European rivals dependent on crude oil-derived naphtha. But with crude prices slipping, that advantage is now eroding.
Still, Dow’s margins have held steady due to its cost-cutting efforts. Margins rose to 19 percent in the quarter from 15 percent a year earlier.
Dow, which is shifting focus to more lucrative businesses such as plastics and electronics, said in May it would reduce its workforce by 3 percent.
The company said on Thursday it was on track to lower costs by $300 million as part of its three-year plan to reduce costs by $1 billion.
Excluding a $375 million pre-tax charge related mainly to the job cuts, Dow earned 91 cents per share in the quarter, beating analysts’ average estimate of 83 cents, according to Thomson Reuters I/B/E/S.
Dow’s shares were down 2.8 percent at $48.58 in late morning trading, easing from a day-low of $47.10.
Reporting by Amrutha Gayathri and Swetha Gopinath in Bengaluru; Editing by Savio D'Souza