INSIGHT: Looking for new ways to preserve cash

11 May 2009 17:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Chemical producers have had an inordinately tough time of it for the past six months and there are few signs of much relief.

True, volume increases have indicated that destocking in some value chains is coming to an end. Prices have moved higher in some markets. But daily news bulletins make it clear that in vitally important customer sectors there is more destocking pain to come.

Producers’ swift reactions to the downturn has been impressive. Chemicals makers have cut back hard on fixed costs; working capital has been reined in. The total job losses across the sector has continued to mount.

The positive outcomes have been apparent in the rush of first-quarter financial results. The industry has had to adjust fast in an operating environment so different from that of a year ago. And the reaction has been swifter than in past downturns.

This indicates either that companies are more responsive than they were, or that the operating environment became so bad so quickly that they had little choice. It would be encouraging to believe the former, but more realistic, perhaps, to accept the latter.

October 2008 was bad, and December was much worse when the manufacturing industry took an extended holiday. The plant shutdowns forced on chemicals producers have continued through the first quarter. For some companies, temporary closures have become permanent.

Of concern now is the length, rather than the extent, of the downturn. Many levers have been pulled to get businesses into shape to cope with new, low levels of demand. Corporations have been run for cash and the outcome has been surprisingly positive.

The surprise has been the amount of cash some of the most exposed companies have been able to generate. Companies should have been prepared for a downturn, or for what some like to call bottom-of-the cycle conditions. The problem has been that this downturn has produced conditions that few could have imagined.

The question really is: where do we go from here? No one can bank on the upturn. Visibility remains extremely poor. Some claim to have seen increased chemicals demand in some durable goods markets. Destocking has probably come to an end in markets for consumables.

But doing business over the next six months is still going to be far from easy. The pressure will have to be kept on costs and on the generation of cash.

Companies may feel that they have experienced the new low but they could be shocked again should this proved to be a w or even multiple wtype recovery. A slump following a partial recovery would be extremely damaging.

What levers do companies have left to help them through further difficult times? Operations management has excelled as operating rates have been forced down. And business management has responded with money-saving schemes.

But as the downturn drags on, decisions need to become more strategic. Short-time working could extend to lay-offs, the costs of which will have to be borne at some stage. Production plants are not closed simply, or with little or no cost. Apart from lay-offs, there are the costs of idling and eventually, possibly, of environmental clean-up.

The results season has highlighted how close some companies are sailing to the wind. And if, as some in the industry suggest, there is no real demand pick-up until the end of 2010, it is not just they that will be in increasing trouble.

Polyolefins players will be under particular pressure as the recession driven downturn runs into the expected period of weak supply/demand balances as new low-cost production capacities come on stream in the Middle East.

The first waves of trouble have forced companies to manage operations more closely and seek out new ways of preserving cash. But if the flow of cash remains as constrained as it has been, then companies’ abilities to fund working capital and capital spending will become even more strained. Those with a significant debt burden will be particularly poorly placed.

Recent volume increases for some products are welcome but a great deal more is needed before executives can begin to feel much in the way of comfort.

To discuss issues facing the chemical industry go to ICIS connect


By: Nigel Davis
+44 20 8652 3214



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