INSIGHT: INEOS contends with downturn but core demand is suffering

24 April 2009 18:00  [Source: ICIS news]

By Nigel Davis

March better for INEOSLONDON (ICIS news)--INEOS calls the business plan it will negotiate with its banks this year a “work in progress”.

The report, expected in May, will lay out new growth and financial projections for the group as it contends with the worst chemicals downturn in decades and what many have called the worst global economic conditions since the Second World War.

There was some good news in the firm’s first-quarter trading update that was released on Friday, which highlights the slight upturn seen in March. The edge has been taken off the steep downturn by increased demand from Asia.

The North American olefins and polymers (O&P) business has benefited from the demand pull, which has helped to maintain capacity utilisations. O&P North America performance has also improved alongside domestic demand.

Europe remains weak but integration of O&P with the refineries at Lavera, France, and Grangemouth, Scotland, is paying off. INEOS says its crackers have run at above the industry average as a result.

Polyolefins has seen some improvement in demand, led by sales into packaging. But, as with many chemicals businesses currently, the offtake into automobiles and durables remains weak.

That weak “core” demand has hit the intermediates businesses – these are INEOS Phenol, Nitriles, Oligomers, Oxide and ChlorVinyls – and is likely to continue to do so. Sales into consumables are better.

INEOS says its refining business has benefited from a “solid demand environment”. The company said it also benefited from diesel demand and the refineries were run at maximum rates during the first quarter.

There was some weakening in March on middle distillates (gasoil, diesel and jet fuel) but these started to recover in April. A turnaround at Grangemouth in April will hit volumes, it said.

INEOS had been prepared for the bottom of the cycle, although not for times as tough as these. But it said it is keeping up the run rate on its €200m ($263m) 2009 cost-saving plan.

Capital spending has been cut back sharply, although it is likely to be have been somewhat higher at the beginning of the year than in the second half.

Physical inventories are down an impressive 20%, and there is also encouragement to be had from the fact that replacement cost earnings before interest, tax, depreciation and amortisation (RC EBITDA) were €73m in March. Earnings at that level were €170m in the first quarter. The company did not suffer the massive stock write-downs at the end of the first quarter that it had to book at the end of the year.

INEOS has always wanted to get back to something approaching more normal operating conditions and it is not difficult to suppose that it is (almost) there.

Times are difficult to say the least, but significant closures have been announced. It is not clear yet, however, whether the measures announced to date – the €200m cost cutting for 2009 was announced last year – can continue to be sufficient.

There are no immediate calls on cash for interest payments but the company needs to be running a lot harder than this. RC EBITDA was €390m in the fourth quarter of 2008 and €1.620bn for the year as a whole, according to data revealed to investors in January. INEOS doesn’t like to talk in any detail about its sales but says that it is a $47bn enterprise.

Net debt at the end of March was €7.5bn and cash balances were about €560m. Investors will be encouraged somewhat by news of the uptick in March but still concerned at the sustainability of current Asian chemicals demand.

It is certainly the core customer industries for INEOS, and other chemicals makers, that are suffering. And it is by no means clear that the big players in these vitally important downstream sectors can recover anytime soon. Stretching the recovery out into 2010 provides a bleak outlook for every indebted company.

INEOS says it continues to work on its new business plan and has yet to agree financial covenants with its banks. More on the liquidity position, the group’s bank-consent process and initiatives taken to deal with the current economic conditions are expected to be revealed in May.

($1 = €0.76)

For more on INEOS visit ICIS company intelligence
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By: Nigel Davis
+44 20 8652 3214

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