INSIGHT: An industry constrained by credit

30 March 2009 23:11  [Source: ICIS news]

By Nigel Davis

SAN ANTONIO, Texas (ICIS news)--This is an industry constrained by the credit crunch. The inability, or unwillingness, of banks to lend hobbles sector merger and acquisition (M&A) activity. Don’t expect too much in the way of restructuring in the coming months.

Deals are being discussed but financing is the critical issue. In the pits of the slump too, who wants to sell, unless they really have to?

Value has been destroyed in more ways than one since the downturn really took hold in September.

The first quarter has been bad and there are few robust signs of recovery. A slight upturn in demand in China has been seized on by some but the prospects for a sustained return to growth are not good.

Chemicals demand appears to be driven by speculation and the rise in the price of naphtha. If naphtha prices fall later this year then demand is likely to drop again, some believe.

There is little optimism at this year’s National Petrochemical & Refiners Association (NPRA) annual International Petrochemical Conference in San Antonio. Just a sense of resilience in the face of adversity.

“The petrochemical industry is facing the most challenging environment we have seen in our lifetime,” SABIC’s vice chairman and CEO, Mohamed Al-Mady, said on Monday. Petrochemicals markets remain volatile. “Overall the signs of recovery are weak,” he says.

These are words, remember, from one of the strongest players in the business, and certainly one processing some of the cheapest feedstocks.

Companies globally have optimised operating processes in this downturn.

Indeed, the ingenuity of process operatives and engineers has been exemplary.

But companies can only re-optimise operations to a point.

Demand destruction in chemicals has been brutal. How extensive? It is not yet clear.

Petrochemicals recovery will take time. It relies so heavily on a return to better health of important downstream industries and sectors such as automobiles, construction and electronics.

The strain put on companies has been immense and is not likely to let up any time soon.

And, given the constraints put on restructuring, it is difficult to see what is going to give first.

There is a whiff of bankruptcy in the air and it is likely that more companies across chemicals will be forced to seek bankruptcy protection. The amount of debt due for re-financing across chemicals generally this year and next has been estimated at a staggering $36bn (€27bn). This is at a time of low operating rates and reduced cash flows.

Solve the banking crisis and fix chemicals? Perhaps not.

The petrochemical industry was heading towards its cyclical downturn before the financial crisis and the collapse of commodity markets took hold.

This is the worst of times for players at the top of many chemicals chains. New plants coming on stream in the Middle East and in Asia will add a great weight of supply.

This is not a great position to be in against the backdrop of demand destruction, let alone reduced demand growth.

A worrying scenario for the sector is one of companies languishing, with demand low, plants idled, or operating at low rates, and looming debt-servicing issues.

Some in the sector talk of the downturn weeding out the inefficient operators and, particularly, the inefficient plants, but this may not necessarily be the case.

In 2009 the petrochemicals business faces its severest test for decades. The outcome can by no means be certain.

($1 = €0.75)

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By: Nigel Davis
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