INSIGHT: The bellwethers that show times stay hard

25 March 2009 15:48  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Has BASF’s small Number 1 cracker in Ludwigshafen become a bellwether for the chemical industry?

The plant is being brought down again, this time for an extended period – it was run on hot standby from mid-November to mid January while the sector was in the pits. Its closure now, from mid-April for at least three months, is a clear indication that nothing has improved for chemicals.

The first quarter of the year has been bad with downstream demand depressed across most segments of the business. BASF’s decision indicates that the second quarter is not likely to be much better.

The chemicals giant says that it has five production lines idled at its main production site at Ludwigshafen in Germany and 60 more lines globally running at very low rates. Its global production capability is reduced by more than 25%.

The ethylene BASF produces in Europe, Asia and the US is not used to make the mainstream thermoplastic polymers but a myriad of products for many markets. The news, therefore, demonstrates the very breadth of this downturn.

The slump is making life hard for most companies with producers operating in specific segments particularly badly hit. Commodity petrochemicals producers are feeling the pain but also are the makers of coatings and catalysts, like BASF, that feed the global automotive markets. Construction chemicals are depressed as are chemicals for electronics. BASF is big in each of these.

The downturn is likely to have a similar impact to that of the 1980s to which it is increasingly being compared. Currently, there is little indication that the bottom has been reached although there has been talk of the first signs of an upturn in some chemicals markets. It is much too early to herald a chemicals Spring.

Demand remains depressed but some re-stocking is being seen leading to somewhat higher prices – assisted by the rising price of crude oil. Companies have to be prepared for the long-haul.

This downturn will weed out the most financially exposed firms and fundamentally affect many different chemical product lines. Indeed, it has already begun to do so.

There is always a great deal of talk about competition in this sector and the fact that in certain products, while producer numbers have declined, they remain largely at a high level. The recession of 2009 will sort some of that out.

BASF believes that as much as 6m tonnes of ethylene capacity in the US and Europe will have to close for the commodity ethylene cycle to improve. Producers of polyolefins, oxides and glycol face a significant capacity overhang driven by new capacities in the Middle East and will be hard hit.

The closure of uncompetitive polyethylene plants in Europe and of olefins units in the US are symptomatic of the downturn and the prospect of looming overcapacity.

While overcapacities have always been the bane of producers in chemicals where specialities rapidly become commodities, it is the slump in demand and the lack of demand growth that will drive real rationalisation. The impact is as bad as it can be: it is multi-product and multi-regional.

Take a chemical far removed from ethylene: titanium dioxide, but one that is vitally important to the makers of a diverse range of industrial and consumer products. Think coatings, construction, and skin care at the very least. Titanium dioxide is the white pigment widely used in paints, plastics and paper.

“The new economic reality will force major industries to permanently change the way they operate,” DuPont’s voice president and general manager for Titanium Technologies, Richard Olson, said last week.

Olson reckoned that during the economic downturn the titanium dioxide industry must operate more cautiously, keeping inventory at levels only sufficient to satisfy customer requirements, scrutinising all capital expenditures and avoiding investment in new capacity without some certainty of a reasonable return, according to a DuPont press release. But that is what most producers of most chemicals are forced to do now.

“It may seem as though TiO2 is at the extreme end of the supply chain from consumer goods, but in tough times, when people stop buying cars, house paint and washing machines, we can suddenly find ourselves sitting on unproductive inventory. That has to change,” Olson added.

And he warned: “Longer term, the industry must emerge from the recession leaner, more in tune with customer needs, and better able to satisfy demand with just-in-time supply.”

That is the key message: that companies cannot simply sit this one out; they will be forced, one way or another, to change the way they operate and even, possibly, their strategic direction. Plants will close, product lines will be rationalised along with portfolios and, in the extreme, some industry players.

TiO2 is a bellwether business because it is so closely tied to automobiles, construction and consumer appliances. The recession in these parts of the economy, which shows no signs of turning, directly affects makers of the white pigment. It also affects makers of a host of other chemicals ultimately tied to ethylene: or, rather, to gas and to liquids cracking. The recession is deep seated and its influence will be deeply and widely felt.

To discuss issues facing the chemical industry go to ICIS connect
For more on ethylene and titanium dioxide visit ICIS chemical intelligence

By: Nigel Davis
+44 20 8652 3214

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