18 December 2001 17:30 [Source: ICIS news]
First reports from Shell’s analysts' briefing this week have focused on the company’s ‘war chest’ and the fact that it is looking for acquisition opportunities. Having cut capital employed and costs the Anglo-Dutch energy group says it will deliver good returns even in a continuing recession. Unfortunately, that will not be the case in chemicals.
The Basell joint venture with BASF was identified at the briefing as part of the $7bn (Euro7.8bn) of poorly performing assets. Once again chemicals is exposed as the underperformer despite transformation of the portfolio and the cost base over the past three years.
The third quarter financial results told much of the story. Shell’s chemicals earnings were down 87% at $28m on sales 37% down at $2.5bn. Unit sales margins were 17% lower reflecting weaker demand and greater competitive pressure. The US business was in loss for the quarter.
Shell’s chemicals portfolio is much changed but it has to carry the burden of bottom of the cycle operating conditions. Now, there are 11 businesses on 17 sites employing 9000 people. In 1998 Shell had 21 chemical businesses, which operated on 54 sites and employed 21 000. Shell has $8.6bn of its capital tied up in chemicals compared with $12.7bn three years ago.
The change at Shell has run deep and in bringing the company much closer to the cracker, management has realised $650m in cost improvements. A return on average capital employed (ROACE) over the chemicals cycle of 13% is achievable, it says, compared with something closer to 7% in 1998. The longer term target is an average return of 15%.
Of course, all petrochemical producers are having to react to extreme operating conditions – BP has just cut back its senior management team and combined business units, cutting the number from 26 to 16. The sector is being hit hard by low product prices and weak demand. Business conditions are the worst for 20 years and prospects are hardly bright.
It depends who you talk to but some improvement can be expected if end-use demand starts to grow again - the supply chain might have to fill fast. On the other hand, the supply/demand picture suggests that pricing power will lie in the hands of the customer for some time to come.
Petrochemicals growth, however, has not moved off trend and is expected to remain strong in the long term. That is why companies like Shell remain fixed on investment in the Far East, where the demand growth is, and in advantaged feedstock areas like the Middle East. Shell’s capital investment in chemicals has been cut back hard but spending over the next few years will be sufficient to move the business much more strongly towards Asia Pacific and the Middle East. Shell has earmarked annual spending of $800m for chemicals, although this figure does not include expenditure on the Nanhai cracker project in China.
Shell has to seek low-cost volume growth in established regions like Europe. In the US it is determined to integrate plants more closely with the Gulf Coast refineries giving it the advantage of feedstock flexibility. That will help lift returns in a business which has been burdened over the past year and more with high feedstock and energy costs.
Shell has to continue to do everything it can to bring costs down in chemicals. The current target is for an annual 3% reduction. Some cuts will be hard to find but plant, integration and technology upgrades will help lift the calibre of the business.
The company has been asked to do a lot this year already. The 2001 annual saving total is projected to be $650m in 2001 ($100m more than the target at the end of 1999 and $300m more than the target set when the change process began). Shell’s main problems lie with Basell, which has been forced to mothball 10% of polypropylene (PP) capacity and cut costs further.
Basell's accelerated, so-called synergy programme is set to realise cuts of Euro250m in the cost base by 2003, and Euro100m has already been delivered. Further feedstock integration will play a key part in lifting the business. The joint venture is moving towards more than 70% integration with Shell and BASF, from a current measured 50%.
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