FocusINEOS early sign of credit problems in chems

21 November 2008 14:05  [Source: ICIS news]

By Mark Watts

Chems firms will struggle to find cashLONDON (ICIS news)--Chemicals producers in Europe are at high risk of breaching bank covenants in the new year as tight credit and falling demand take its toll on finances, an industry analyst said on Friday.

UK-based chemicals giant INEOS this week announced it was asking creditors for waivers on covenants covering a reported €5bn ($6.3bn) loan, but PricewaterhouseCoopers’ (PwC) UK chemicals leader warned that this was a sign of things to come in the industry.

“The banks are nervous,” said Richard Bunter. “We’re going to see companies breaching covenants they’ve agreed with banks, especially in the next quarter.”

“There is less cash to go around at the moment, they’re going to be more selective where they put it and the places they do put it, they’re going to insist on bigger margins in terms of interest rates,” he added.

When companies breach such agreements, banks have the right to renegotiate the terms, which could result in higher interest rates on loans.

“I suspect it will become more widespread in the sector as time goes on,” Bunter said.

The banks were not the only ones affected by poor liquidity in chemicals markets, with producers becoming increasingly nervous about selling to customers with poor credit.

Market players and analysts this week said tight credit had led to producers to demand extra guarantees when selling products.

“As demand is falling from the established customers they’re having trouble being happy selling to less established customers that don’t have the credit ratings,” said ING chemicals analyst Samuel Simon.

“We may see more chemicals companies insisting on cash in advance or cash on delivery or shorter credit periods," he added.

Companies with high exposure to the automotive and construction industries were thought to be especially at risk, suffering with decreasing volumes and tight margins as demand in end-user markets plummets.

Earlier in the week, the world’s largest chemicals producer BASF announced a raft of production shutdowns and cutbacks, while on Friday Arkema, a firm with high exposure to automotives, said it would shut down 12 plants in December due to lack of demand.

Customers have been destocking, holding off and waiting for lower crude prices to feed through to products further downstream.

Chemicals analyst at Arthur D Little, Edouard Croufer, thought these were just the early shutdown announcements, with more to follow through the rest of the year.

“The magnitude of the slowdown has surprised many, many operators and people are going to try and mothball or shut down some activities until the outlook is clearer,” he said.

“When you stop buying at one end of the chain you immediately transfer your problems to the other end, you have practically no buffer in between. A very rapid transfer to the beginning of the chain, where it is the easiest to slow down or stop something,” Croufer added.

Although widespread shutdowns are common when demand bottoms out, Bunter warned that the financial crisis had exacerbated the problem causing an extraordinary long downturn in petrochemicals.

“If you get a banking crisis at the same time as a [cyclical] downturn, history shows the cycle will last even longer. I don’t think the pick-up will start until the early part of 2010,” added Bunter pessimistically.

($1 = €0.80)

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By: Mark Watts
+44 20 8652 3214

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