27 September 1993 00:00 [Source: ICB]
Pointing the finger at Germany has become a common pastime as petrochemicals fortunes have spiralled down. But there is no evidence of a failure by German players to face up to the common European difficulties, and even the most cumbersome of bureaucratic structures are now being modernised.
By Mary Heathcote
IN 1992, west German chemicals production grew 1%. Organics grew 2%. But the strong pressure on prices led to unsatisfactory results, reports the VCI.
On average the production of plastics increased slightly, by 1%, but again the low price level 'caused an extremely unsatisfactory earning situation'.
Chemical turnover in 1992 fell by 0.6% to DM164.8bn ($103bn). Domestic turnover slipped 0.1% to DM96bn. Foreign activities contributed DM69bn, 1.4% down on 1991. One reason for the unsatisfactory business development, says the VCI, was the fall in producer prices. On average these decreased 1.9% over 1991. 'Price losses had to be accepted in almost all areas - and the revaluation of the deutschmark increased the pressure without bringing any relief on the feed-stock side.'
These factors conspired to produce last year a 30% drop in German chemical earnings. Furthermore the deteriorating trend became more pronounced as the year progressed. 'Given the decline in earnings of more than 20% in 1992, and of 25% in 1990, this is an alarming development,' the VCI concluded. Net earnings as a percentage of sales had by the end of last year dropped to around 1.9%.
The beginning of 1993 saw continuing economic recession and by the end of the first quarter the harsh realities had truly started to emerge. Chemical production in Q1 1993 fell 17% in Germany, chemical turnover was down 11%. Chemical prices were continuously under pressure.
'With the exception of the building industry no stimuli for growth are expected in the remainder of the year from domestic activities,' said the VCI. 'The chemical industry is not expecting an increase in production during the rest of 1993. Measures to reduce costs and streamline structures may give grounds for hopes of a stabilisation in the earnings situation.'
The reversal in German fortunes has sent shock waves across a European industry accustomed to the country's consistently solid economic and industrial performance. The reaction mirrors the apprehension with which German economic recession has been greeted by its EC neighbours. It seems that longstanding robust performance in both cases has been mistaken for inviolability - a dangerous type of misunderstanding and one that can form the foundation for a whole range of misconceptions. For example, that German chemicals companies do not cut jobs, do not shut plants, do not participate in broader cooperations.
For each of these much-cited 'national characteristics', an objective observer would have to conclude that in fact German companies have simply not needed to take too many of these actions in recent years. Now that circumstances have changed, there is little evidence in practice to support the view that any such measures are being shirked. Nor that such moves are against German nature -any more than closures and redundancies go against the grain in any country. Furthermore, perhaps the only really 'German' feature of German industry -the traditional structures that link companies and managements - now seem to be changing at both levels.
As has been the case across Europe, economic recession in Germany has for chemicals been merely the final nail in a coffin largely built of petrochemicals misfortune. Those companies less exposed to bulk markets have suffered less - the conclusion is inescapable. In response significant measures have been implemented across the board. And underlying the more immediate steps to cut costs and production in line with shrinking returns and demand, more fundamental structural changes are emerging in the most traditional of Europe's nationally developed petrochemical industries.
BASF chairman Jürgen Strube last month outlined in some detail the efforts which BASF - perceived as the most bureaucratic of all the German producers - is making in this direction. Companies intent on surviving in competition today must be capable of change and willing to act in the spirit of continuous change.
'Rigid adherence to habit is the first sign of decline. Being innovative means playing an active part in shaping the processes of change.
'For me,' Strube said, 'one of the most important tasks of the present day is to create structures which enable our company to anticipate with a high degree of flexibility the requirements of the market and ever-changing economic conditions.'
The decision by BASF to put its next large cracker investment not only outside Ludwigshafen but outside Germany itself is perhaps the single most visible signal of a change in ethos. Or, that interpretations of an 'ethos' were figments of the observer's imagination. Either way, the move can be viewed as a significant departure with profound implications for the longer term.
For now, however, the single implication most exercising industry watchers is whether or not the startup in Antwerp at the end of the year will spark cracker closures back at Ludwigshafen, or possibly within the ROW joint venture with Deutsche Shell. Whilst its detailed review of post-startup market implications continues, however, BASF itself has elected to hold its own counsel. And of course, as virtually all of BASF's 400 000 tonne/year share of the nominal 600 000 tonne/year ethylene output will be absorbed by captive derivatives production, the initial problems will fall those faced with losing current ethylene outlets.
Similar precautions were taken by Veba Oel in the late 1980s when it first planned the second 440 000 tonne/year cracker at its Gelsenkirchen site with Ruhr Oel joint venture partner PdVSA. 'We secured the ethylene volumes very early,' Veba Oel board member Friedel Wehmeier emphasised to ECN. 'More than 80% was secured before we took the decision to proceed. Our customers at that time anticipated continuing demand growth would require new plants.'
In the event, that new demand had not materialised when the cracker was started midway through last year. However potential second hand effects on the market did not materialise, Wehmeier believes, and the only visible effect of the startup has been a slight shift in German imports. The new cracker is currently running at around 80% utilisation, he reports, reflecting the reduced consumption of its customers.
Veba adopted the same approach when it decided to go ahead with an expansion to 220 000 tonne/year of the refinery propylene produced in the OMW joint venture with partners Conoco and DEA at Karlsruhe. Before startup the additional output was sold on long-term contracts. Furthermore, even with the added capacity, the Veba group remains a net propylene buyer. The Gelsen-kirchen crackers are already run at low severity to maximise propylene output.
Nonetheless, in the looser propylene markets of Q2 and Q3, the Karlsruhe startup this summer has not been absorbed as easily as the Gelsenkirchen cracker start reportedly was last year. Wehmeier acknowledges that European propylene has problems at present, but believes these to be relatively short-lived, with the surplus built up in Q3 likely to be absorbed during Q4 and Q1 of 1994. The Karlsruhe plant is currently running at capacity.
On ethylene, however, Wehmeier is more optimistic than some of his counterparts. Pointing to slight price improvements earlier in the year, he emphasises his belief that Q3 will prove the trough and hopes that some improvement will be achieved in Q4.
On aromatics, Wehmeier expects paraxylene to improve during 1994 and fall short in 1995. 'The first good indicators are already there,' he says. Orthoxylene will improve with the construction industry once an economic recovery is established he believes. Veba closed down more than 200 000 tonne/year of aromatics capacity last year to help balance new output at Gelsenkirchen.
Veba Oel is a good example of the traditional German petrochemicals approach. Developed from its oil roots, it was partly state-owned until the late 1980s. Base petrochemicals are produced within refinery operations providing optimum integration. The link with sister company Hüls, Veba Oel's biggest petrochemicals customer, has until now been an arms length relationship. The announcement earlier this month (ECN 13 Sept) that the Hüls' polyolefins activities would from 1994 be merged into Veba Oel's activities to improve integration with olefins operations is a major change in the group's structural organisation and strategy.
Talks will continue, both with Austria's OMV - a group with remarkably similar credentials and traditions to Veba - and with unspecified others (ECN 13 Sept). But whether the reorganisation is merely a prelude to spinning off a polyolefins/olefins joint venture or a structural change in businesses Veba will continue to operate directly, the move could mark the end within the Veba group petrochemicals organization of the longstanding arms length relationship between olefins and polyolefins. Of course, Veba empashises, Veba Oel's existing strong merchant ethylene seller position will continue in the broader European market.
Aside from the integration of Hüls' polyolefins activities, Veba Oel now is set for a period of petrochemicals consolidation. 'Our long-term strategy was to build the new olefins plant so that we are big enough to take our petrochemicals operations into the next century,' Wehmeier says. The company now has some 7-8% of the European olefins market and is content to move forward with the integration it has now in place. The immediate priority remains restoration of profitability - petrochemicals operations fell in loss in 1991 and have continued in the red since. A 20% reduction in costs is targeted for this year and early 1994, and outstanding investments have been put on hold, Wehmeier reports.
As the world's largest olefins buyer, Hoechst represents the flip side of this traditional organisational coin. But while it too is looking closely at the way its businesses are organised and structured, there is no intention of altering this position. 'What does backward integration really mean?' queries Hoechst director of purchasing Alfred Rad. 'For me it means at least back to a refinery, and to achieve this in Europe would cost a minimum of DM10bn!' Furthermore, looking back over a ten-year period, he concludes that a buying position 'has not been bad at all'. Currently Hoechst buys 1.2m tonne/year of ethylene in western Europe, and 2.2m tonne/year worldwide. Propylene purchases worldwide are 1.2m tonne/year, of which western Europe accounts for 800 000 tonne/year.
Hoechst's priority in the current evaluation of polymer operations, says polymers and films chief Professor Schuhmann, is to get the best out of existing businesses. The joint venturing of PVC with Wacker he believes is a good example. In the first six months of this year, the market dropped 5% but the joint venture saw an increase over the combined 1992 performance, he reports.
PP, the focus of attention in joint venturing speculation, is also the subject of talks involving Hoechst, Schuhmann confirms. And not only with Petrofina, the commonly rumoured candidate for partnership. But he stresses the difficulties and intricacies involved in such negotiations. 'The big question is not how the capacities etc fit together, but how the cultures fit.'
Alongside potential alliance activity, Hoechst is part way through a major review and streamlining study of its PP business in Europe. The programme, scheduled for completion by the end of 1994, will have a dramatic effect on Hoechst's PP business, Schuhmann promises. 'We have new technology and new equipment at our plants in Spain, Knapsack and France. Some of our sites are coastal and integrated with feedstock supply. But we believe we can improve the way we use these advantages.'
Central to the exercise is to ensure the appropriate logistics are in place, for example whether the right types of PP are made in the right amounts, and at the best sites. 'If there is a specific need for a particular grade, then you will make a better margin. Otherwise you won't,' stresses Schuhmann in frustration at the currently popular assumption that if a polymer is differentiated it will automatically earn differentiated margins, regardless of its suitability for purpose. '90% of the market is NOT specialities,' he adds.
This approach represents a new focus for Hoechst, and a departure from the speciality focus it has employed in recent years. Rad emphasises the importance of maximising income from existing products. He believes the likelihood of a dramatic capacity rationalisation is remote, though Hoechst itself has made valid efforts to balance new plant starts in the last year with closures, and not necessarily of old units. Some 130 000 tonne/year of PP capacity and 90 000 tonne/year of PVC has been shut in the last year. 'We will have to learn to live with 80-85% capacity loadings and learn to make money from this,' he says.
Rad believes Q4 this year will be critical in determining Europe's petrochemical fortunes for some time. In the first half of the year, he believes, the market was basically still in the grips of the battle for share. 'Now I get the feeling people are starting to learn lessons from this.' Nonetheless, 'most people still do not believe that Q4 could be awful.' Overall in Germany there is no sign of a recovery. Hoechst is anticipating a 2% drop in European PE volumes this year, and PP growth of only 3%.
Balanced against both the Hoechst merchant buyer philosophy and the traditional Veba merchant seller stance is Deutsche Shell, a perfect example of a long-term German market participant that is also influenced by its foreign ownership and trans-European participation. 'It has never paid to run a merchant cracker in my opinion,' says managing director Rainer Laufs.
Deutsche Shell's chemicals business is based on three legs - trading, aromatics based at the Godorf refinery, and the ROW joint venture with BASF. Further activities were developed during the mid-1980s in response to the German market. Now Laufs is confident Shell will develop a still stronger position in selected business segments in Germany, recognising that in normal times it is large with good returns and strong logistics. He also stresses the strengths of Shell's own German operations.
'I think our operations here are special,' he says. 'We have extremely well developed oil and chemical interfaces at Godorf, Cologne and in ROW.' The ROW operation is short on ethylene, and will be slightly long on propylene.
'Also, we have access to pipelines and flexible crackers, so we can play with the components.'
Investments have been carried out in honing existing operations. In addition, Deutsche Shell approached the Treuhand a year ago with a proposal to invest in the Bohlen cracker and some derivatives in eastern Germany. The move was logical, Laufs believes, and represented a solution for the impasse that has developed around the Leuna/Bohlen privatisation. It also represented a big investment. But the Treuhand turned it down and now, Laufs says, circumstances have changed.
Currently Deutsche Shell's chemicals operations are being changed with the European petrochemicals organisation and altered group philosophy. On the one hand, the German subsidiary has taken responsibility for aromatics across the continent and will be judged on both its own bottom line and its contribution to a European petrochemicals bottom line. On the other, the divestment of agrochemical operations to American Cyanamid and the potential reorganisation of PP activities, notably the Cologne operation, into the proposed Shell/Montecatini joint venture company are significant reorganisations.
And the final driver of short-term destiny is economic - Deutsche Shell has been in the red since 1991, and is implementing strict cost cutting measures, including a 10% reduction in jobs, on top of the divestment and alliance programme. It is also reviewing options on its advanced materials business.
Laufs, like Wehmeier and Rad, emphasises that there is no longer a German market as such in petrochemicals. Nonetheless Germany clearly has cost disadvantages. These notwithstanding, Laufs believes there are activities in Germany even now where money can be made, provided the operation is good and the products differentiated. In Europe as a whole, he suggests, the problem so far has been in the minds of the people involved - in that if there is a machine there it is only human to switch it on and turn it up. Like Hoechst's Schuhmann, he believes a solution lies in a fundamental change in behaviour.
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