BP Chemicals: improvement masks real difficulties

07 November 2001 16:43  [Source: ICIS news]

BP Chemicals’ third quarter figures, poor as they are, look better than might have been expected.

The company was able to bring idled capacity back onstream over the three months – production from plants at Grangemouth in the UK, Lavera in France and Chocolate Bayou in Texas were lost in the first half because of operating problems.

A closer focus on profitability also seems to have helped. BP has been looking hard at all its business processes and the accelerated efficiency drive appears to be paying off. These are particularly tough times for all petrochemical producers and BP is no exception.

The bare bones data show that the company was able to lift volume production back to reasonable levels in the third quarter following the second quarter slump when its chemicals business just to keep above break even with replacement cost operating income before special items of $9m. In the third quarter profit was pushed back to a more respectable $113m which compares with $267m in the third quarter of 2000. The profit figures for the nine months were $203m against $896m.

Third quarter production of 5.8m tonne was 12% above production in the second quarter and 9% over production in the third quarter of 2000. Restored operation at the three ethylene cracker sites was a factor here, as was the inclusion for the first time of output from Erdolchemie bought from Bayer.

BP has said before that the production outages cost it about $100m in profit in the second quarter so given their restoration and Erdolchemie there has been little if any quarter on quarter improvement. There are a number of factors – including Erdolchemie and the new Solvay operations – which suggest that BP is moving ahead quickly in chemicals. But the profit stagnation illustrates the fact that this is one of the most difficult chemicals operating environment the company has faced.

BP chairman John Browne alluded to that in August when he said that the company’s investment in chemicals needed greater justification. That signalled further restructuring and cutbacks which included a reining in of capital spending and targeted cost reactions of $250m a year. The third quarter and nine months chemicals results include $27m and $67m respectively of restructuring costs and costs relating to Erdolchemie.

BP has been spending relatively heavily in chemicals but upgraded cracker facilities – such as Grangemouth – should stand it in good stead when the operating environment improves. Taking costs out of the business has involved plant closures in the UK and in the US as well as job losses from internal restructuring.

There is the faintest glimmer hope in the chemical indicator margin (CIM) the company produces, taken from Chem Systems data weighted for the BP Chemical portfolio. The margin of 110 in the third quarter is based on two month’s actual data and one month of estimates and is up five points from the margin of 105 (adjusted to account for Erdolchemie and the other portfolio changes) in the second quarter and128 for the third quarter of 2000. Operating conditions are poor to say the least in petrochemicals worldwide – with cracker rates probably close to historical lows – but the third quarter CIM does back the BP Chemicals financial figures which show real profit improvement in the US and in Europe. Whether that improvement is sustained through the rest of this year, however, is another matter.

By: Nigel Davis
+44 20 8652 3214

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