Re-visiting defensive strategies

09 June 2003 17:15  [Source: ICIS news]

A growing negative chemicals trade balance will weigh heavily on US producers and probably more so than natural gas and energy price volatility. Producers’ strategic approach to the business will have to change in a much more competitive world where imports assume greater importance and where it is no longer possible to export your way out of trouble.

Without doubt, it is becoming increasingly difficult to make money in both petrochemicals and specialties. US producers have been heavily burdened by wildly fluctuating feedstock and energy costs and clearly the natural gas pricing and availability issue has assumed significant importance in corporate thinking. But other trends are as if not more critical over the medium and longer term. At some stage new gas availability will make life a lot easier for producers up and down the chemicals production chain. But what won’t go away is the fact that new aggressive producers will be targeting US chemicals markets, some with a distinct competitive advantage.

This is a critical point. US Gulf Coast producers are losing their long-held cost supremacy and it is not simply because of the price of gas today. Producers in the Middle East are making inroads and are much better able on a cost basis to serve growing world markets for petrochemicals and polymers. The situation is similar in many specialties where companies in countries like India and China are undercutting more established chemicals makers on price and gaining acceptance in the established markets in the West as much as the growing markets of Asia.

Rapidly the US has lost its long-held positive chemicals trade balance. And it looks as though the balance has tuned negative for good. In 1995, the US chemicals industry (including pharmaceuticals) produced a $20.5bn (Euro17.5bn at today’s exchange rate) trade surplus. In 2002, the chemicals balance of trade was a negative $5.0bn. There are two sides to this coin, of course, so it is not just the loss of export markets that is of concern. As is starkly apparent in polymers now, products move both ways in global chemicals and, particularly when times are hard, US markets look increasingly attractive. Growing imports of finished goods are as influential in shrinking markets as is chemicals demand.

In these circumstances it is refreshing to hear that at least one group of consultants is addressing the issue in a positive way and trying to engage companies in what might be called a strategic sanity check. Peter Spitz, a founder of Chem Systems, Andrew Boccone, a president of Kline & Co, and Michale Eckstut, formerly head of the chemicals practices at Booz-Allen & Hamilton and latterly at A T Kearney, are teaming up to offer senior managers across the sector some direct and seasoned advice. One issue they certainly want to address is this topic of the US chemicals trade balance and a changed world in which companies will have to focus a lot more on stiff competition in their home markets.

Around the time of the official launch of Chemical Advisory Partners, Peter Spitz tells me that he would like to investigate defensive strategies with some firms. How do companies cope with the fact that life has changed, he asks, and what do defensive strategies actually mean?

Many US producers have significant supply chain advantages which give them a distinct advantage in local markets. The petrochemicals infrastructure on the Gulf Coast is a case in point and there might be more to be made from that. Across the board, local players are usually better received in local markets and the advantages can be capitalised upon. Spitz believes too that companies can be more innovative and proactive in the market place.

As suppliers try to get on the same contract terms as their customers, does it really makes sense to run a plant flat out and push the excess onto the export market? Probably not. There are new business models where companies can make money from the service element of their offering that are worth investigating, he believes.

To date some companies have shown an interest in the approaches Spitz and his colleagues are proposing. There aren’t that many new ideas in chemicals today but the world and the chemicals operating environment continues to change. It is a question of recognising those changes, deep seated or otherwise, and of addressing them effectively.

By: Nigel Davis
+44 20 8652 3214

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