INSIGHT: The battles that have not yet begun

26 January 2009 17:14  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS new)--The playing out of this chemicals cycle will be different as companies across the sector navigate the depths of the downturn.

The problem is that no one can yet, realistically, see the bottom of what has become a major global slump. The economic and credit crisis has strangled manufacturing industry; it is hitting consumers hard. And, as yet, despite all the talk of stimulus, markets have been reluctant to move. Confidence is a commodity in very short supply.

The (chemicals) world waits largely to test the strength of key physical markets following the Lunar New Year holidays. The slump is as much a global as a regional event and unprecedented in nature.

One might expect upstream petrochemicals and polymers players to be hit severely and that is indeed the case. But makers of products of all sorts are under tremendous pressure.

Demand for almost every chemical, apart from those finding their way into food products or into the life sciences – agrochemicals and drugs – is depressed, significantly in some instances. The chemicals giant BASF made that plain in its profits warning last week.

The plight of downstream consuming sectors, principally automobiles and construction but also a much wider array of industries, is apparent.

Having enjoyed an extended period of strong margins, driven by demand and high prices, the world’s chemicals players find themselves at the painful end of the down cycle. And, although it is very difficult to look too far ahead, prospects for the industry in the short to medium term are not good.

It will take time for downstream industries to recover, or rather to return to anything approaching what had hitherto been considered as normal operating conditions. That means that the world’s chemicals makers are in for a tough time.

Some plants are slowly coming back onstream: an indication that the year-end 2008 period of de-stocking is coming to an end. It is only now, however, possible to begin to gauge how severely demand has been affected.

In the first half of this year companies are likely to focus on cash retention rather than earnings, analysts at Citigroup believe. To say the least, they warn that the next year and more are going to be difficult for chemicals makers.

Post de-stocking, they suggest, the battle will begin. And by the end of the year there will be wars over market share.

Companies are fighting for their very survival, as the flow of corporate news thus far this year has underlined. As a sector, chemicals is hard hit by this toxic brew of credit crunch and global recession. There are few places to hide.

Business models will be tested in this downturn as never before. Not so long ago industry leader INEOS was talking of its businesses being able to generate cash in “normal bottom of the cycle conditions”. Unfortunately, business conditions in chemicals since October have been anything but normal.

INEOS has negotiated the waiver of certain of its debt covenants. It must, however, agree a new business plan with its lenders by April this year.

Other chemical producers based in Europe have not, as yet, been forced into such a radical reappraisal of the cost base, but they may yet be.

Citigroup believes that once working capital benefits are exhausted and, with margins depressed by weak demand, restructuring and consolidation will be needed to kick-start a recovery. This period of heightened chemicals structural activity is not expected for 12 to 18 months.

The petrochemicals business is likely to have an extremely tough time of it in 2009 but segments such as industrial specialties are also being hard hit. This group of products includes additives, textile, leather and paper chemicals, rubber and phosphorus chemicals.

Such a broad-based downturn hits companies like Arkema, Lanxess, Clariant and DSM as well as a giant like BASF, Citigroup says. Defensive segments such as personal care, vitamins and nutraceuticals can only offer some relief.

Companies are adopting a 'wait and see' attitude before instigating radical structural change, hence the bank’s suggestion that the restructuring period is, as yet, some time off.

But when the period of restructuring really takes hold it is likely to involve the most pressured European chemical companies and some parts of the larger players.

Companies will be forced, once again, to fully re-appraise the cost base and the portfolio.

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By: Nigel Davis
+44 20 8652 3214

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