INSIGHT: Trying to look past the trough

30 September 2008 15:57  [Source: ICIS news]

By Nigel Davis

 

MONTE CARLO (ICIS news)--The next 18 to 24 months are set to be tough in petrochemicals, with energy costs high, demand depressed and finance uncertain. Some executives will have to learn fast how to manage through the downturn.

 

But time has to be set aside now to think more clearly about what comes next. At times like these managers have to hunker down and get on with it. This is when a company’s ability to ‘manage through the cycle’ is tested to the full.

 

The least efficient production assets and distribution networks are exposed when times get hard. Parts of the petrochemicals and polymers business is already on the downward slope.

 

There will be some relief in ethylene in Europe this quarter given the recently negotiated contract price €108/tonne ($156/tonne) down at €1,120/tonne.

 

But the demand outlook is uncertain - although largely negative. New capacities coming on stream in 2009 will push olefins into the trough of its cycle, probably in 2010.

 

But what comes next?

 

The ethylene chain, particularly, will lead the sector out of the trough of the cycle. Demand will pick up fast as the world economies recover and again show signs of growth.

 

Additional production capacities due on stream in the Middle East and in Asia over the next two years will have a negative impact on operating rates. The impact of their introduction will be more keenly felt during times of lacklustre demand growth.

 

But the new capacities will be worked through the system, and ethylene demand will rebound.

 

The spring back in margins, however, will be less certain and will lag on market sentiment and the cost of feedstocks and energy.

 

Companies can benefit from a huge boost if they have assets on stream and running well when the market turns. This is part of the trick of managing through the cycle.

 

Investments are made close to or in the trough often more by luck than by judgement. Nevertheless that luck plays a vitally important part in deterring which companies survive and prosper in this business and which lose out.

 

It may take years but it is highly likely that those who miss the chance offered by the upturn eventually slip away from the scene.

 

The current downturn is different and exacerbated in ways not yet fully understood because of the ongoing developments in the global financial crisis.

 

“We have never been here before,” one commentator said on Monday. “And nobody knows what is going to happen.”

 

But demand will return and producers need to be prepared for the pick-up.

 

In 2011 or 2012, petrochemical companies will emerge from difficult times and will need to be in shape to make the most of a precious few quarters that will help drive them along the upslope of the cycle.

 

Running towards the trough in chemicals, it helps to have a clear view beyond that of what needs to be done to have the right assets in place for the up cycle.

 

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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