Capex cuts could save Europe chems €3.1bn - Morgan Stanley

16 January 2009 19:44  [Source: ICIS news]

TORONTO (ICIS news)--Europe’s chemicals producers are set to “dramatically” reduce capital expenditures (capex) this year to achieve cash savings estimated at €3.1bn ($4.1bn), analysts at Morgan Stanley said on Friday.

“We believe the European sector will reduce capital spending dramatically in the near term, as it did through the previous downturn in 2000 to 2003,” the bank said in a research note.

Capex reductions were likely among the key measures producers such as BASF, Akzo Nobel, DSM, Croda, Clariant and Solvay would take as they were facing what Morgan Stanley called “a lost year”.

Only Wacker and Air Liquide were not likely to make any significant capex cuts, the bank said.

The bulk of Wacker’s capital spending related to pre-sold volumes, partially financed by customers while Air Liquide, for its part, had a solid project pipeline in place through to 2010, the bank said.

The €3.1bn estimate – which is based on the bank’s analysis of the chemical industry’s 2000-2003 capex to depreciation ratio – represented 8% of the sector’s net debt and compared with a total sector dividend payment of €4.7bn, it said.

Savings from capex cuts would go a long way to cover dividends, the bank said, but added that the main strategic question facing the chemical industry in 2009 was whether to sacrifice future growth to pay dividends.

In addition to capex reductions, producers would shut more capacity, cut variable costs, shorten budgeting periods and, potentially, consider cuts in dividends, as they struggled in the tough economic environment, the analysts said.

Led by BASF’s sweeping cuts announced in November, producers had closed capacities in the just concluded 2008 fourth quarter at a level that already exceeded total capacity closed in the 2001/2002 economic slowdown, they said.

About 25% of European ethylene capacity was closed in the fourth quarter, reflecting a 20% collapse in demand, and operating rates were below their 20-year lows, the analysts said.

“It is not surprising that remedial action taken by the European chemicals companies has been so aggressive and quick, when one considers the scale of volume declines likely to be witnessed in the 2008 fourth quarter, and indeed, in our view, in the 2009 first quarter,” they said.

“Not only is underlying demand drying up, this is being compounded by customer de-stocking in critical end markets, including - but not exclusive to - automotive, construction and electronics.”

($1 = €0.76)

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By: Stefan Baumgarten
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