INSIGHT: Leadership skills will be tested in this downturn

27 March 2009 17:43  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The leadership skills of petrochemical industry executives will be tested to the full over the next 12 months as firms in the sector battle through the downturn.

Companies by necessity are focused on preserving and generating cash. Managers cannot see far in the current economic and industry climate but understand that the going will remain extremely rough.

Some plants idled in the really tough times look now as though they will be closed permanently. The industry has shifted down to a new operating level but inventories through most product chains remain high.

As delegates gather in Texas for the 34th NPRA International Petrochemical Conference the talk is of capacity rationalisation and of potential mergers.

Almost everyone has a unit down, DeWitt’s Earl Armstrong pointed out in one of the consultant’s online, pre-NPRA presentations this week.

And he added that almost all producers have a candidate for closure.

The closures announced to date are only the start of the shake out. Whole product chains are affected.

The rationalisation should weed out the old, inefficient and costly plants, although experience suggests that this is not always the case. Closures will also be forced by balance sheet pressure and the increasing need for some to focus on a tighter core of businesses.

The chemical industry has about $38bn of debt maturing in 2009/2010, according to Lazard managing director Alasdair Nisbet, speaking at this year’s pre-NPRA CMAI meeting. Now that is a statistic to wrestle with.

Those producers who have been particularly careful, or the ones that you might call astute, will be able to re-finance. Balance sheet strength but also size and influence will be the critical factors. But there will be those that fall into difficulties.

Armstrong suggested that many companies, large and small, are in trouble.

Rationalisation is one thing: it can help bring costs down, although with all closures there are a host of additional, longer term costs. Restructuring is another.

This industry will be restructured through this downturn and the subsequent period of recovery in a different way.

The slump is similar in many ways to that seen in 1980. There is concern that recovery will be a long time coming and be difficult to achieve.

It is likely that recent acquisitions are setting the scene.

Merger and acquisition activity is constrained now but open to those with access to the resources. Entities linked to sovereign wealth funds are seen as players in such constrained financial times.

Abu Dhabi’s International Petroleum Investment Co has bid for Nova Chemicals. State-owned oil and gas players are seen as candidates in future petrochemical industry restructuring.

And as Armstrong says it is not only Middle East parties that are interested in chemicals assets in North America. Players from Asia might be expected to grasp opportunities to gain or strengthen a US presence.

Given the state of play in the industry and that expected over the next few months and even quarters the number of those opportunities is likely to increase.

Managers then have the chance to make their mark on the sector through the downturn. Some will steer a steady course while others will be forced to negotiate particularly difficult seas.

Some companies will pay dearly for earlier M&A spending, while some will pay for the slips made now. This is a time to be sure of what you are doing.

To discuss issues facing the chemical industry go to ICIS connect


By: Nigel Davis
+44 20 8652 3214



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