Petrochemicals pass their peak but industry thrives in Q1

08 May 2000 00:00  [Source: ICIS news]

The full force of the upturn in chemicals driven by higher prices at last working there way through the system was clear in the first quarter. Commodity and speciality chemicals makers alike benefited from much better times globally, a stronger Asia, higher demand in Europe and continued economic and demand strength in the US. Feedstock costs rose with the higher oil price but in most cases these higher costs could be passed on. Yet there are some fine balances. The quarter to quarter comparisons indicate a petrochemicals peak somewhere near the turn of the year. There are real concerns about whether strong demand growth will continue in the US. For US and other producers, export markets are strong, driven by Asia's return to growth. It is a question now of how robust that return to growth is.

Data from NPRA (the National Petrochemicals & Refiners Association) highlight the strong rise in volumes reported by petrochemical companies in the first quarter. Running down the list of major products, benzene production was 8% higher than in the first quarter of 1999, ethylene production up 6% and refinery-sourced propylene production up 28%. The figures, some estimated, suggest that production peaked around the turn of the year. First quarter production volumes for most of the chemicals reported were lower than in quarter four last year. The exception is cumene where a 6.8% rise is suggested.

Looking at random across the industry gives an overall picture for the first few months of the year and a pointer for the remainder. Comparisons with the depressed first quarter of 1999 illustrate just how much better most busineses are performing now. Comparisons with the final quarter of last year show that it might be difficult to maintan momentum as this year progresses.

BP Amoco, takes Chem Systems' indicator data and weights them based on its portfolio. The result is an indicator margin that illustrates the operating environment for the company. The indicator margin in the first quarter of 1999 was $122 a tonne and in the first quarter of this year $119 a tonne. However, during quarter four 1999, it was $128 a tonne. BP Amoco's first quarter replacement cost operating profit for chemicals was $259 million, which is in line with the fourth quarter adjusted profit of $26 million. Profit in the first quarter of last year was $206 million.

Higher feedstock costs and the weaker euro were a burden in the first three months of this year. Clearly, the weakening of the euro against sterling and the dollar took its toll at the company where UK operations remained in loss (-$31 million compared with -$76 million in the fourth quarter of 1999 and +$42 million in the first quarter of that year). Continued weakness of the euro and more industry capacity will limit the extent of the recovery. Nevertheless, the outlook is for better commodity margins - if demand continues firm and oil prices stabilise.

If more evidence were needed of the upturn in petrochemicals then there is no need to look further than SABIC. The company's net profit of $246 million for the quarter was more than four times higher than last time and 10.4% higher than for the fourth quarter of last year. SABIC did not give a sales figure but said that production was 10% higher, at 6.6 million tonnes, and sales were up 14% in value terms.

Among the large diversified companies the Bayer result stands out. It is indicative of the general upward trend. Strong demand pushed Bayer up in the first quarter leading to double-digit growth rates in all four business segments. Polymers accounted for 38% of sales, 33% of operating profit and 38% of cash flow. Gains in healthcare meant the segment made 33% of sales and 30% each of group cash flow and operating profit. Agriculture accounted for 14% of sales, 25% of the operating result and 19% of cash flow; chemicals 15% of sales, 12% of operating profit and 13% of cash flow.

The upturn in chemicals in the quarter was significant. Sales were up 26% at E1100 million and cash flow was up by a similar amount but margins were squeezed by higher raw material costs. Profits were held on a par with last year, at E146 million, and the return on sales fell.

Polymer sales were up by 23%, at E2700 million. The operating result rose from E299 million to E348 million. Bayer will add more plastics capacity to keep pace with demand.

expect further consolidation in constructionThe losses accumulating on a big power project have driven another process engineering contractor into a suitor's arms. Stone & Webster filed for Chapter 11 bankruptcy this month and Jacobs engineering stepped in to take the company which had seen its market value collapse on reports of heavy losses. The final straw was the charge for the overrun of a power project in Rhode Island.

The move is another example of the consolidation trend sweeping the engineering, procurement and construction (EP&C) industry. There is huge potential in the sector from projects globally but clearly there are too many companies bidding for the same business. EP&C companies are feeling the cost burden more sharply, particularly the legal side, and the strain is taking its toll.

Technology is bringing project costs down but the costs of putting together project proposals are rising sharply. The contractors find themselves in a tightening vice. Raytheon was the first company to decide enough was enough with its engineering and construction subsidiary. Having incurred heavy losses on a power station project in the UK, Raytheon Engineering & Constructors was sold in February to Morrison Knudsen. Also that month, Jacobs Engineering acquired Stork's engineering and construction business.

Massive restructuring in the petrochemical and energy industries are making life difficult for EP&C companies which have to become much more adept at managing risk. One answer is to get bigger, fast, as the US contractors are showing. No company in the West has more than a 10% market share, so simple arithmetic indicates that further consolidation can be expected in the sector.

industry needs vision as much as flexibility and imaginationenvironment is about to change, however, is a moot point.

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