Union Carbide Shares Drop After Warning
October 13

NEW YORK (Reuters) - Shares of Union Carbide Corp. (NYSE:UK - news) dropped almost 10 percent before recovering in the stock market on Friday after the chemical giant's warning that third-quarter profits would be less than half of what analysts had expected.

The Danbury, Conn.-based company is the latest in a string of chemical concerns, including DuPont Co. (NYSE:DD - news) and PolyOne (NYSE:POL - news), to warn in recent weeks that profits would be hurt by soaring costs for raw materials made from crude oil and natural gas.

Shares of the company, which is being acquired by Dow Chemical Co. (NYSE:DOW - news) in a deal that has seen its completion delayed several times, fell as low as $31-11/16 on the New York Stock Exchange (news - web sites), dropping below its previous 52-week low of $35-11/16. By the end of the session, however, the stock bounced back to $35, off $1-3/4, in a recovering market.

The stock is down some 45 percent since the beginning of the year, similar to falls witnessed throughout most of the industry. The Standard & Poor's index of chemical companies has dropped 37 percent this year, to 332 points.

Union Carbide's tumble came after the company said late Thursday that it expected to earn about 20 cents a share in the third-quarter, down from the 36 cents a share it earned in the same period last year.

Before the warning, analysts on average had been forecasting profits of 57 cents a share for the third-quarter, according to First Call/Thomson Financial, which tracks earnings estimates.

Along with others which have warned of shortfalls, Union Carbide blamed its earnings troubles on soaring costs for oil and gas. "Obviously, it was disappointing news, but not terribly surprising given what's going on with raw material costs,'' said Frank Mitsch of Chase H&Q. "The third quarter is going to be an extremely difficult quarter.''

Crude oil prices in the third-quarter averaged $31.63 a barrel, compared to $21.27 a barrel during the period last year, while natural gas prices averaged $4.48 per million British thermal units, up from $2.55 a year ago.

What's more, Union Carbide said prices for its own chemicals, mainly polyethylene and ethylene glycol, failed to keep pace with rising raw material costs, pressuring margins. "It's a huge shortfall and it is one of the reasons that I think there's a strong indication that it just wasn't feedstock costs going up and product prices going down,'' said Paul Leming, an analyst with ING Barings. "In addition to that, I think there's evidence from the size of shortfall that the level of business and demand was weaker than expected in September.'' The company, which will release its earnings on Oct. 30, said in the statement on Thursday that sales volumes and revenues were weaker than had been anticipated in September.

Union Carbide and Dow had hoped to complete their merger, first announced in August of 1999 and valued then at $7.8 billion, by the first-quarter of the year. They are still awaiting regulatory approval, however. Leming said that, for the moment, Union Carbide's stock is following that of Dow. "To a certain extent, the value on Carbide is largely going to be set by where its trading to Dow,'' he said. Shares of Dow fell 1/2 to $24-1/16, just above its year low of $23-7/8.

Among other chemical companies, DuPont dropped $1-3/8 to $40-9/16, Eastman Chemical Co. (NYSE:EMN - news) fell $1-7/8 to $35-11/16, and Rohm & Haas Co. (NYSE:ROH - news) fell $1-1/8 to $27-13/16.The Dow Jones industrial average, meanwhile, rose 157 points, or 1.57 percent, to 10,192.