INSIGHT: Little respite expected for most from low volumes

22 April 2009 16:04  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The contraction in the global economy is worse than that expected only a few months ago and chemicals producers are necessarily cautious about business in the short term.

The sales data from DuPont on Tuesday and the firm’s projections for the second quarter speak volumes. Demand remains depressed because downstream customer sectors are still suffering and there is very little relief in sight.

It is clear that January and February were dire for DuPont and were likely to have been for most chemicals producers in North America and Europe. There was an upturn in March driven by economic stimulus packages, most notably China’s, but little to be cheerful about.

DuPont now expects the global economy to decline by 2.5% in 2009; just three short months ago it expected the fall to be 0.6%. In January global motor vehicle builds of 68m were expected for the year. Now the number is more like 58m. US housing starts were projected at 720,000 units; now the forecast is for 560,000 new homes, it says.

Clearly, this is a deeper recession than many predicted and market volatility continues to undermine business confidence.

“We expect a larger volume contraction in 2009 compared with what we expected just three months ago,” DuPont CEO Ellen Kullman said on Tuesday. Given its volume expectations, not surprisingly, DuPont has reduced its earning forecast for the year.

That does not mean that the second quarter might not look better than the first.

De-stocking in businesses like industrial chemicals and polymers, titanium dioxide, automotive coatings and polymers, electronics and building materials appears to be coming to an end. First-quarter volumes for DuPont in businesses like these were down more than 30% compared with a year earlier but it looks now as if there will be some sequential quarter-to-quarter increase.

Not all products are following the same cycle but the time to call the bottom of the current downturn seems to be creeping closer, although a new level of demand has yet fully to become a reality.

It is, though, beginning to hit home. DuPont talks of more cuts and staff reductions. It wants to retain what Kullman calls “high-quality people” and has re-directed some employees to an ongoing inventory and receivables “mega project”.

Companies cannot afford simply to cut: they need to do so judiciously. On 15 April BASF said it was preparing for short-time working for between 2,000 and 3,000 production employees at its main site at Ludwigshafen in Germany. This is between 7% and 9% of the Ludwigshafen BASF SE workforce.

“Capacity utilisation rates at many plants have remained very low since the beginning of the year, and there are no signs of a sustained improvement in orders from key customer industries in the foreseeable future,” said the Ludwigshafen site chief and BASF executive board member Harald Schwager.

BASF could extend short-time working – the way companies are able to operate in Germany with the government paying 90% of an employee's net wage for a period – beyond production units should the demand environment not improve in the second half.

There can be little confidence at the start of the second quarter in much beyond a marginal improvement in industrial businesses compared with the first quarter.

The sector has been lifted by stronger prices, pushed up in Asia particularly on the back of higher-priced oil and naphtha and by easier credit in China. But there can be little doubt that demand generally remains severely depressed.

SABIC’s first-quarter financial results, released on Tuesday, reflected the extent and the depth of the downturn but also hammered home a few current sector fundamentals.

The Saudi Arabia-based petrochemicals major is becoming the company to watch as it brings on stream big new, low-cost joint venture facilities. Not for nothing did its CEO, Mohamed Al Mady, say in the US in March that SABIC was prepared to “restructure the global petrochemical industry”.

SABIC’s competitive advantages are its low costs - primarily low feedstock costs - and strong balance sheet.

Chemicals production plants worldwide may be running at exceptionally low operating rates but that is not the case in the Kingdom. It is probably also not the case across the Middle East and, although for different reasons, in China.

SABIC’s total production (of chemicals, fertilizer and steel) was up marginally in the first quarter with sales volumes up 5%, the company said in its first-quarter report.

While established producers of petrochemicals, plastics and other mainstream chemicals suffer in what Kullman has described as the “worst global recession since the 1930s”, there are those who are relatively much better placed.

And talking of cutbacks, the SABICs of this world might be expected to capitalise on their feedstock position and the production output of new plants as others suffer - disproportionately.

When the cuts come, the cost efficient and strong can seize the advantage. Production cutbacks, particularly, fall, once again disproportionately, on the higher-cost producer.

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By: Nigel Davis
+44 20 8652 3214



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