INSIGHT: Demand remains depressed, difficult to predict

19 January 2009 16:51  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--BASF’s latest profits warning underlines the extent and depth of this downturn as well as its exceptional nature.

Nothing has changed for the better over the past few weeks. And since the turn of the year it has become increasingly apparent that the lack of downstream demand is sucking the lifeblood out of chemicals.

Manufacturing plants across so many industries are being run at greatly reduced rates. Chemicals makers are trying to turn three and four day weeks in downstream industries into reduced operating rates at the plant.

BASF’s warning is stark in that it highlights the fact that demand is depressed for all the company’s businesses apart from products for crop protection and food. That, in effect, means that businesses across the entire chemicals chain are depressed.

BASF can resort to short-time working and avoid lay-offs so it has flexibility on how and where it cuts back. And it is clear from its latest statement that it can move fast again if it needs to cut back further. Restructuring and efficiency plans are being accelerated as they are at other companies. Sites are being closed in North America and Asia.

December was dire as other chemicals firms have acknowledged. BASF’s operating rate globally is currently less than 75%. In November, when the company first announced its slew of production cutbacks, operating rates were said to be depressed by between 20% and 25%.

So the situation has deteriorated. “The situation remains tough and difficult to predict,” said BASF chairman and CEO Jurgen Hambrecht. “We do not expect the economic environment top improve in the coming months.”

The hardest hit businesses for BASF are those selling into the automotive sector but chemicals for construction and other areas are affected. Analysts except a 30% fall in sales from basic chemicals and plastics.

That is not surprising given the current state of business outlined on Friday (16 January) by the American Chemistry Council (ACC) in its latest “business of chemistry” report. This weekly update has made sober reading for the past three months.

“The individual product reports indicate a sharp downturn in the ending months of 2008,” the ACC’s Emily Sanchez said.

“Indeed, the production for chemicals excluding pharmaceuticals dropped at an alarming pace in December and for many basic chemical segments 4th quarter volumes were off over 20% on year-earlier comparisons. The railcar loadings data confirm this weakness extending into January.”

It is the extended weakness that gives greatest case for concern. There are few signs of an upturn, if any. Where re-stocking may have been expected, demand is at such a low level that producers are seeking all available storage.

LyondellBasell met it creditors on Friday and the presentation it made to them was bleak to say the least. It was filed with the US Securities and Exchange Commission (SEC).

The world’s largest polypropylene producer clearly had problems in the fourth quarter with hurricane-related outages exacerbating a difficult situation. It was forced to seek Chapter 11 bankruptcy protection for its US operations on 6 January this year.

The near-term story has been one of a significant decline in orders and an extreme decline in profitability. LyondellBasell stressed the current unpredictability of demand and pricing. Its overall operating rate in the fourth quarter was as low as 50% and it says there are “no definitive indications of reversal” in the demand environment. Polymer prices collapsed in November and December.

LyondellBasell says that its polymer margins in the EU in the quarter were “significantly negative”. The change in prices over the quarter gives some idea of just how bad the pricing environment became. WTI crude was down 60% and northwest Europe naphtha down 70%; Gulf Coast ethane was off 57%. But gasoline was down 70%, polypropylene 46% and polyethylene down 49% according to the data LyondellBasell presented.

BASF may be well out of the business of making polyethylene and polypropylene but its latest warning shows that it has not been immune from the global collapse in chemicals demand.

Capacity utilisation in chemicals fell to 68.8% in December in the US which is a level of activity historically associated with disruptions from hurricanes, the ACC says. A year earlier, the operating rate across the business was 78.8%.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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