BP Chemicals has to cut further if it is to perform

12 February 2002 17:55  [Source: ICIS news]

BP Chemicals has given details of just how much further and harder it has to cut back in the face of the difficult petrochemicals operating environment and poor 2002 outlook. It is simply not acceptable for a business like this to be returning under 3% on capital employed. The operating environment is lousy, of course, but that means that costs and spending have to be reined in.

BP let it be known today that the $250m (Euro287m) cost reduction programme in chemicals will lead to a cut of about 15% in the chemicals workforce worldwide. The cost cutting process announced in August is gathering momentum and will eventually lead to the loss of some 2000 jobs. Capital spending will be cut back further too and to 20% below the $1bn announced last year. No new plants will be built other than in China – where there are three projects underway, including the giant Secco joint venture petrochemical project with Sinopec and Shanghai Petrochemical. BP is no longer talking of taking part in petrochemicals development in Iran, and other nearer-term projects have been put on hold.

It is not difficult to understand why these cuts have to be made. Petrochemicals fundamentals probably aren’t going to improve this year. Everyone is waiting for an upturn in demand but a lot of capacity has to be absorbed before the positive impact of stronger demand growth is felt. BP’s rivals continue to cut costs and so must it if it is to perform well now and better in future.

The BP chemicals fourth quarter and full year financial results don’t make easy reading. Business slowed markedly in the fourth quarter. Over the year, BP had to cope with simultaneous major second quarter outages at three crackers. In February, BP Chemicals was looking for a 20% increase in production volumes in 2001. At the end of the year, production volumes were up just 3% due to new production and acquired assets. In the fourth quarter further portfolio rationalisation was announced including the sale of the company’s butyl and isopropyl acetate business in Antwerp, Belgium, the closing of a high density polyethylene (hdPE) plant in Grangemouth and the idling of one polypropylene (PP) line at Chocolate Bayou in the US. BP stopped alcohol production at Pasadena in the US to concentrate on alpha olefins. At some stage it is likely that more PP capacity at least will have to be shut down.

Profits in the fourth quarter- excluding the effects of special items relating to restructuring and acquisitions – slumped to $39m from $113m in the third quarter and $140m in the fourth quarter of 2000. If the special charges are added in the company made a (replacement cost operating) loss in the fourth quarter of $106m against a third quarter 2001 profit of $105m and a fourth quarter 2000 loss of $88m. The geographical breakdown of RCOP (replacement cost operating profit) shows fourth quarter losses in the UK, the rest of Europe and the US. However, over the year, the steepest profits fall was in the US – from $581m to just $62m. Chemicals global turnover in 2001 was $11.5bn from 11.2bn in 2001.

BP chairman John Browne let it be known clearly in August 2001 that something more had to be done in chemicals when he said the company’s chemicals investments had to be justified. The response has been a raft of job cuts and a reining in of capital spending but they are really just the public manifestation of more than 200 projects being implemented now to lift efficiencies across the board.

"We are in motion in response to a difficult environment," chemicals’ chief executive Byron Grote says. The "transformation" process as it is called will drive the company forward, Grote believes, in what Browne says will be "a challenging year".

BP Chemicals had a tough time of it in 2001, a year in which it made important strategic moves, doing deals with Bayer, Solvay and latterly with Veba. The challenge this year is to make a lot more money from the growing portfolio and to bed in new organisations that ultimately should let it save even more money. This year will seem a lot quieter for the company but it is clear that it has a great deal to do.

By: Nigel Davis
+44 20 8652 3214

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