INSIGHT: Strategies in tatters as credit crunch continues

02 January 2009 16:37  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The sharp downturn in demand, exacerbated by the credit crunch, is threatening the already weak chemicals business and tearing well-founded strategies to shreds.

Just three months ago analysts were pinpointing Dow as the chemical company to watch as it sought to drive through its twin asset light and more end-use market approach to the business.

The blow to that strategy in its entirety – and, indeed, the chemical giant’s strategy in the Middle East – recently came when Kuwait’s Supreme Petroleum Council reversed its approval of the pivotal K-Dow venture.

Dow wanted K-Dow to work not simply to give it cash to help pay for the planned acquisition of specialties make Rohm and Haas, but to give it at least the virtual upstream integration it craved.

A broader Middle East venture for Dow would have been supplemented by access to advantaged feed for its global cracker network. At long last it looked as though Dow could fix many of the problems it acquired when it bought Union Carbide at the start of the decade.

What Dow does now remains to be seen, but the company’s hand could well be forced by events.

The petrochemicals outlook is bleak to say the least, with destocking masking collapsed demand in critical supply chains. Last quarter’s sharp slowdown will extend into the early part of 2009, a year when the first impact of upstream petrochemicals capacity begins to bite.

The global economic downturn could not have come at a worse time for petrochemicals, with olefins chain makers facing a global (olefins) overcapacity of 27m tonnes over the next few years, according to the latest estimates from industry consultancy ChemSystems.

A measure of the threat of this capacity overhang alone can be gained by the fact that the sector has not faced excess capacity of more than 6m tonnes in previous slumps.

Dow’s inability to conclude the K-Dow venture would leave it short of much needed cash to help buy Rohm and Haas at the previously agreed price of $78/share, or a sum of $18.8bn.

Faced with such miserable prospects for petrochemicals and polymers, and hardly a sparkling forecast for so much of the rest of its portfolio, the company is likely to be forced to make further difficult decisions to help bolster its balance sheet and satisfy shareholders.

Only a few short weeks ago CEO Andrew Liveris stressed that Dow’s dividend, which has been consistently maintained for 96 years, was safe on his watch.

How Dow spends its cash is likely to have to change significantly and further pressure will fall on the company’s big capital projects, including the Ras Tanura venture with Saudi Aramco, the project plan for which is due late this year.

The Kuwaiti decision on the K-Dow venture highlights the current high degree of uncertainty in petrochemicals and begs the question of what value Middle Eastern players now put upon close ties with partners from the more developed petrochemicals world.

For LyondellBasell, the tough decision will be whether to seek Chapter 11 bankruptcy protection as its businesses continue to be battered by the downturn.

The company, created in the heady days of 2007, has run up against the buffers of low demand and the ongoing impact of the credit crunch on the industry.

It has to service a debt mountain of $26bn and has sought an extension until 4 January of $290m in fee and interest payments on a bridge loan facility while it suffers what it has called severe demands on its liquidity. A request for a credit extension from an affiliate of its shareholder Access Industries has also been denied.

Hurricanes in the US hit the company hard last year, as did high petrochemical feedstock costs. Subsequently, it has suffered along with the rest of the industry from customer destocking and the significant decline in demand for polymers.

LyondellBasell began losing ground fast in the final three months of the year as the worst impact of the US Gulf Coast hurricanes was felt alongside the sharp industry slowdown and the falling price of oil. Fourth-quarter results are expected to be bad, although the company is likely to be in profit for the year.

The early part of January, however, will prove to be a tough time for what is now the world’s fifth-largest chemicals maker.

LyondellBasell is different from many, although by no means all, in that it is so highly leveraged. But it faces the knock-on effects of the credit crunch and the industry slowdown that could shake it to its very core.

For more on Dow Chemical and LyondellBasell visit ICIS company intelligence
Read Paul Hodges' Chemicals & the Economy blog
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By: Nigel Davis
+44 20 8652 3214



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