InterviewTemporary shutdowns will become permanent - consultant

23 April 2009 11:12  [Source: ICIS news]

By Will Beacham

LONDON (ICIS news)--Up to a third of the current temporary capacity shutdowns in the US and Europe will be made permanent, a leading consultant said on Thursday.

However, concerns about the social impact and financial cost were preventing companies from making the decision to close plants permanently at present, Thorsten Ploss, partner at Roland Berger Strategy Consultants, told ICIS.

A swathe of temporary closures amounting - in some cases - to 20% or more of global capacities had been announced since the fourth quarter of 2008. As yet, very few companies had decided that idled plants would be mothballed – requiring significant work to restart – or permanently closed.

According to Ploss, companies would eventually be forced to take tough decisions to close plants and deal with the social and financial consequences. “Ultimately this will be needed in the chemical industry. There’s a shift in production capacity either to [follow] demand or to cheaper feedstocks, so I think it will be permanent in the end. It’s an opportunity for the European and US chemical industry to close disadvantaged plants.”

He added: “It’s difficult to say, but maybe a quarter or a third of the existing temporary closures could become permanent.”

Ploss said the downturn was likely to be ‘W’ shaped, “where the last leg [of the ‘W’] is not as [steep] as the first one. At the end of this quarter – or the beginning of the next one – we’ll see the destocking effect once again so there will be a small spike. Then there will be a further slump. There are different reasons – [demand from] the government stimulus plans will go down because the money is spent. I think we’ll see an easing this year, then a hit followed by recovery in 2010.”

He said this downturn was more severe and long-lasting than the 1980s’ slump: “From an initial view this recession might look the same because you had the spike in feedstock and oil prices. Then consumption and demand went down so chemicals fell off the cliff.

“But there are some differences. First of all the main reason for the 1980s’ downturn was massive overcapacity and production. This downturn, ultimately, is caused by the financial crisis, but what has really hit the chemical industry is the massive downturn in consumption and demand.”

According to Ploss, demand in the 1980s fell 10-15%, stayed there for a few months and then returned to normal. This time the slump was far deeper, with falls of 20-30%. He predicted consumption would stay there longer and then start growing slowly, taking much longer to reach the previous level.

To ensure longer-term prosperity, Ploss said the industry would need to get closer to the customer. Rather than innovating in isolation and producing premium products to sell on the market, businesses should “work more closely with customers to identify what their real needs are”.

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By: Will Beacham
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