INSIGHT: Prepared for a tough 2009 but some inventory re-build

03 February 2009 16:56  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The only (potential) good news is that when demand returns it could do so swiftly. So companies best be prepared. But as the Dow Chemical fourth quarter results show, the chemicals business currently is severely depressed, in Dow’s words, across all geographies and value chains.

Not surprisingly, Dow took the hit in the fourth quarter in its basic plastics and chemicals businesses but the sharp downturn in the important end-use markets of automobiles and construction is reflected in the slowdown in performance plastics and the loss reported for the segment.

The Dow results reflect the extent and depth of this chemicals downturn amid global recession and the credit crunch.

Dow has seen depressed demand in most applications for most of its products, apart from those directed into agriculture.

Volume demand for products sold into the world’s furniture, appliance, bedding, automotive furniture, building, paper, carpet and other businesses are depressed. The range of end-use markets reflects the way in which chemicals of all sorts permeate the industrial and consumer economy.

Dow’s operating rates in the fourth quarter were an unprecedented 44%. We are likely to see that level of depressed operability reflected across much of the chemicals sector. The US chemical giant’s operating rate for the quarter as a whole was just 64%, the lowest level seen in 25 years.

Without doubt these are difficult times and companies know that they have to focus on cost management and plant operability. Keeping the plants ticking over is a by no means an easy job but is essential if full advantage is to be taken of the upturn – when it arrives.

The stark message from Dow on Tuesday was that it is not expecting demand to pick up for a few quarters. Dow CEO Andrew Liveris used the worrying phrase “and possibly beyond” in the results statement.

This slump will continue but Dow points to the fact that most of the value chains into which it sells are running at very low inventory levels. “When a recovery begins, possibly through government stimuli in the back half of the year, the recovery could be rapid,” says Liveris.

But Dow is planning for a global recession throughout 2009. The implication of that is that the company will continue to take actions on managing cash and controlling costs with the same intensity as in the fourth quarter, according to the CEO.

That attitude is reflected across the sector. Acetates producer Celanese on Tuesday emphasised that while it expects inventory de-stocking to diminish in 2009 it does not foresee a short-term recovery in the global economic environment.

Chemical companies have been hit by the negative effect of inventory accounting as product prices have dropped but that will work its way off. So much depends on how customer inventories are worked down through the year.

Celanese talked of aggressive action in response to the expected prolonged weak demand environment. Most companies’ reactions will by necessity be similar as they seek to marry fixed costs with manufacturing capability.

This recession will see the idling of plants worldwide and eventual closures as new realities are brought home to chemical producers big and small. Dow's Liveris says it will be two to three months before it has more to say on that subject.

One of the most vicious downturns has been in polyethylene (PE) but Dow expects few cutbacks in PE.

The PE business can swing violently although back-to-back steep annual falls in volume are unlikely. And Liveris suggests that PE could bounce back since a large chunk of Dow's PE business is in packaged goods where there has been such a significant inventory drawdown.

It is too early to say that PE will signal the start of the chemicals recovery. The downturn is too widespread and intense for that.

But a tick up for PE will signal that not all is bad and that at least some consumer demand has been sustained. PE may bring relief for some producers battered on so many other fronts.

To discuss issues facing the chemical industry go to ICIS connect


By: Nigel Davis
+44 20 8652 3214



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