INSIGHT: Managing the transition to lower demand

24 October 2008 15:02  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The next few months and quarters will be a testing time for chemicals as companies are forced to manage the transition to a lower demand environment.

Product prices have slumped as demand for so many materials has dropped away; operating rates have been pulled back sharply.

Companies are driven back on their position in the market and the strength of their balance sheet. Customer relationships and financial robustness will be key factors in helping buoy performance in troubled times.

Business has simply come to a halt for many chemicals. In falling markets, who wants to buy, unless they really have to?

“Basically orders just stopped” Celanese chairman David Weidman said on Tuesday commenting on demand for acetic acid in Asia in the first week of October.

Celanese did well in the third quarter, with profits up 23%, but Weidman had to tell it like it is.

The main markets for Celanese products are depressed. Customers simply aren’t buying. The acetyls producer has been forced to lower its full year earnings outlook; its stock price fell 30% on the news.

These are difficult times to say the least as the fall-out from the credit crisis hits companies in the manufacturing sector as well as broader consumer confidence.

Celanese expects the economic slowdown in North America and Europe to continue, and it also sees signs of slowing growth in Asia linked to the global credit crisis.

A BP executive put the situation in some chemicals into perspective on Tuesday. The energy giant remains a considerable chemicals player in olefins, aromatics and acetyls through joint ventures and wholly-owned operations.

Steven Welch, who runs the international refining and marketing businesses, said that demand was falling across the chemicals portfolio, a situation that was expected to last until at least the end of the year.

It is not totally clear yet how much of the slowdown is due to de-stocking and how much to reduced real demand but the signs are ominous.

“The slowdown in building, construction and home improvement use means that year on year we expect [acetic acid] demand to be somewhat negative in Europe and North America. That’s reduced real demand [not just de-stocking],” Welch said during a press briefing.

China’s demand
for purified terephthalic acid (PTA) is expected to be flat in the second half of 2008, for instance, down from a first half growth rate of between 10% and 11%. European demand for polyethylene terephthalate (PET) was expected to be flat for 2008

The fall-off in demand became more noticeable about six weeks ago, Welch added.

“In Europe and the US we’re dealing with an additional significant slowdown. This started in the middle of the year and has accelerated over the last six weeks,” he said.

Producers in many markets have been forced to lower prices to at least try to stimulate stronger demand growth. At the same time, others have had to cut back operating rates in the face of bleak market conditions.

Turkey’s Petkim, for instance, on Friday lowered polyethylene and polypropylene prices for the fourth time since the beginning of October. It had cut prices as recently as Tuesday this week.

Middle Eastern ethylene was being sold in Europe at less than half the current third-quarter contract price.

In a different market, caprolactam makers have been forced to cut back operating rates sharply as demand has slipped away.

When the world stops, all are affected and few emerge unscathed. The falling oil price dominates the chemicals business. Companies have ridden a rollercoaster of costs and prices in recent quarters: they continue to do so.

Dow, for example, saw in the third quarter its largest ever quarterly increase in feedstock and energy costs – a whopping 48%, or $2.6bn.

Its third quarter was hit by hurricane related outages, but the company said on Thursday that it expected a global economic downturn to persist through 2009.

In many chemicals markets now the question being asked is how much of the downturn is due to customers working off inventories and how much to actual slowing demand.

The outlook for certain markets is poor to say the least.

One supplier in Europe has said that demand for its linear low density polyethylene (LLDPE) is 10-11% lower than last year in the year to date. Polypropylene demand is also down sharply.

The added concern for most players is that both markets are facing growing import volumes from new low-coast production plants in the Middle East.

European producers will have a tough time competing in a weak demand environment as increasing low cost volumes hit the market.

So much depends now on the price of oil. Customers don’t want to hold product; they’d rather keep the cash. Brent crude was trading down again on Friday at just over $63/bbl and NYMEX crude down at just above $65/bbl.

The market felt that expected OPEC production cuts were propping up the price, otherwise it would be much worse.

In the circumstances companies are forced back on their marketing capabilities and their ability to contain costs and ride the downturn.

“Our leadership teams around the world are actively engaged with customers and suppliers, making appropriate and timely adjustments to any changes in demand,” DuPont CEO Chad Holliday said this week.

“We enter these challenging times in a better position than any prior economic slowdown. Our cash position, borrowing capability, and balance sheet are strong and we remain intensely focused on our operating cash flows,” he said.

''The global economy is now feeling the full effects of the same economic issues that have plagued the US for the past several quarters," Dow Chemical CEO Andrew Liveris said in a statement on Thursday.

“These issues have now been exacerbated by the lack of credit, resulting in a drop in demand not only in the US, but around the world. In our view, we will likely see a global recession through most of 2009," he added.

Dow said, however, that it is well positioned to weather the increasingly difficult economic downturn.

“We have a strong balance sheet,” Liveris said. “We have a track record of strong financial discipline and we are accelerating our focus on what we can control, namely costs and capital, asset restructuring, and other interventions.”

In the coming weeks and months chemical firms will need to apply all available resources to counter the negative impacts of slowing economic growth, the damaging credit crisis and the highly volatile price of oil.

Visit Paul Hodges' Chemicals & The Economy blog
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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