The Investment column: ICI fails to beat the ups and downs of the chemical cycle

Try as it might, ICI cannot seem to escape the rack of the chemicals cycle. It has spent the 1990s trying to exit commodity businesses and launched two big cost-cutting and productivity initiatives in an attempt to provide some insulation from the vagaries of the market. Yet first- quarter figures announced yesterday were again hammered by a familiar combination of currency effects and collapsing prices.

Pre-tax profits crashed from pounds 223m to just pounds 70m in the three months to March. The group said the strong pound shaved pounds 40m off the bottom line while its "best guess estimate" for the full-year impact has been raised pounds 30m or so to pounds 120m since February. The news sent analysts' red pencils through profit forecasts yesterday, cutting them in the region of pounds 100m to around pounds 480m.

The worst damage came in the division most exposed to the cycle. Industrial chemicals dived into a pounds 13m loss from profits of pounds 87m in the same period of 1996 and pounds 143m the year before. The plunge is perhaps not surprising, given a 58 per cent fall in polyester prices and 22 per cent slump in tioxide suffered up until earlier this year. It is ironic that volume growth in the upper teens for both chemicals has not been translated into better returns, but may augur for better times in the rest of the year, while prices are starting to move up again. If nothing else, the combination should provide a decent background for the flotation of the tioxide operation, pencilled in for late this year or early next.

Another disappointing area was the materials business, which sank from pounds 61m to pounds 24m. Profits in acrylics, the raw material used in some paints, plastic baths and similar products, held up well. However, the films and polyurethane businesses both wilted in the competitive heat and Asian over-capacity remains a problem.

Paint, which more than doubled its contribution to pounds 30m, remains ICI's star operation. But Charles Miller Smith, the former Unilever manager who now sits in ICI's chief executive's chair, cannot rest his strategy of bringing the group closer to the consumer on this one division. Buying some of the Unilever speciality chemicals operations recently put up for sale might help, but the group was keeping mum on that yesterday.

Yet ICI is too big and the pace of competition too relentless for it to escape the cycle completely. With pounds 76m of savings achieved in these figures, it looks set to achieve the target of pounds 400m benefits to the bottom line by the end of this year. But much of those will have to be given away to customers unless its rivals cut capacity more aggressively. So, even with the improving outlook, the shares at 700.5p, down 20p, look fully valued on a forward p/e of 19.