INSIGHT: Plant closures expose competitiveness

13 March 2009 17:20  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The question that keeps surfacing in the current slump is just how vulnerable production plants and production locations are.

Chemical companies are under extreme financial pressure and relief from the market is unlikely in the short term. The downturn exposes older plants and the more isolated production locations already suffering temporary shutdowns and low operating rates.

The shuttered units largely are those making chemicals sold into the troubled automobile and construction sectors but clearly there are other vulnerable products and sectors.

As just one example, PPG this week said it would cut 2,500 jobs globally and close plants because of weak end-market demand.

The company will close a plant in France in the first quarter along with several smaller production, laboratory, warehouse and distribution facilities. More plant closures are expected.

“These are sweeping steps that will impact all of PPG’s business segments and regions,” CEO Charles Bunch said. The most significant reductions in personnel and plants would take place in the company’s automotive OEM (original equipment manufacturers) coatings and industrial coatings units, which have been the worst hit by severe declines in global end-use market demand, he added.

ICIS news has already tracked more than 45,000 job losses in the chemicals sector globally during this downturn. It is beginning to build up its database of plant closures. Temporary shutdowns continue to drive anxiety in the business and there are arguments over layoffs and job losses.

The downturn is driving companies to re-assess the future for some plants and locations. Just this week Dow said it would close some 15 plants worldwide when it took over Rohm and Haas at the start of April. The company has to drive operating efficiencies even harder now because of the acquisition and because of the downturn.

Also this week, Total revealed more details of on-going petrochemicals and refining restructuring in France. It will close old low density polyethylene (LDPE) lines in the east and northwest of the country, on sites at Carling and Gonfreville. It is closing an older cracker at Carling and focusing styrene and polystyrene production at Gonfreville.

But the point about the Total plans is that they are part of the drive to focus on integrated petrochemicals hubs in Europe and the US – the company said that in 2006. The downturn is drawing more attention to such on-going plans but it is also helping to accelerate decision making related to isolated and integrated sites.

Chemical companies should have used the extended up-cycle to reinforce plant, site and logistics efficiencies. If they have not done so, for whatever reasons, then the downturn will seek them out.

Stress in the market will continue to expose weaker facilities and production locations. It underlines the messages on chemical industry competiveness drawn from the work of the EU’s High Level Group on chemical industry competitiveness.

Producers in Europe and the US particularly need to pay more attention to all aspects of competitiveness and in doing so will be forced to look at some plants and locations more closely. The competitive threat from producers in feedstock-rich parts of the world or those with better market access is significant.

The close integration of much of the chemicals industry along value chains is hugely important and confers real competitive advantage. Integrating production plants with upstream feedstock providers or with downstream customers makes sense. Shared infrastructure helps saves costs. Sometimes, integrated logistics works.

But clusters are threatened in the current environment alongside more isolated production locations.

The good plants in good clusters will be expected to survive this downturn but the weak links in the chain might not.

The question that has not been probed fully at some locations is what happens when a plant, or in a bad case, multiple plants, are forced to close because of the extreme market conditions. The strains put on cluster integrity could be immense.

Cluster employees understand the challenges and that what is proving to be the worst downturn for the sector since the early 1980s draws still more focus on costs and managing for survival.

Currently it pays not to be alone: to be making chemicals in an isolated location. There is safety in numbers.

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By: Nigel Davis
+44 20 8652 3214

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