INSIGHT: Putting working capital savings to good use

01 June 2009 17:05  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--A hostage to fortune? Perhaps not. But the European chemical industry has been hit hard by factors way beyond its control.

The cyclical downturn that last year most producers expected has turned into a trough of nightmarish proportions. And where are we now? Bouncing along the bottom of a cycle of sorts.

When and how sector players might expect to reap the harvest from the green shoots of economic recovery remain to be seen.

Companies were not slow to react when the downturn hit. And that has to be a good thing. However, the collapse in demand late last year and the extension of miserable levels of demand into 2009 have proved exceptionally difficult.

Business advisers KPMG said last week that sector companies had made cash savings of £18.7bn ($30.7bn/€21.5bn) by turning plants down, cutting production costs and pushing through cost-cutting programmes. That is an impressive sum and can be put to good use.

Paying down debt is one obvious use for these working capital savings. There are those in the sector that will have to retrench in these difficult times, having over-extended themselves through fatter years.

A group of 25 representatives of the European industry were polled to understand how companies can best navigate through this unprecedented downturn.

“The chemicals industry is a hostage to many factors beyond its control," said KPMG’s European head of chemicals, Chris Stirling.

“Our research reflects this and shows our respondents predicting the bottom of the market falling from anywhere between late 2009 and 2011. 

“Magnified by large debts, the chemicals industry has been hit hard by problems experienced in the sectors it supplies. Automotive and construction makes up 23% of our respondents’ end use markets.”

The importance of those linkages have been widely apparent in recent months, and surprised some. And they go to show that until Europe’s economic, and industrial, recovery, is more broad-based, chemicals suppliers will continue to suffer.

“If all the European companies in the chemical sector achieved top quartile working capital performance, they could unlock a considerable amount of capital,” Stirling said. And if the cash were used to pay down debt, savings of £900m could be made in annual interest payments (based on a 5% lending rate).

It is also apparent that there are still ‘best practice’ gains to be made.

Closing the gap in best practice in the sector could prove an important boost to cash flow, KPMG says.

The firm’s research showed that outstanding days of accounts receivable have been cut from 58 to 51, but that there has been a smaller-than-expected reduction in inventory (from 52 to 50 days).

“Rather surprisingly, suppliers are being paid quicker (days payable going down from 35 to 28), which could be the result of suppliers pressing for payment or being concerned about the credit risk of some companies and therefore tightening credit lines,” said working capital associate partner Andrew Ashby.

The downturn has prompted temporary shutdowns and contractor layoffs but European companies have sought to retain skilled, permanent staff. The industry has taken numerous steps to cope with the severe drop in demand. Raw material price movements have largely been favourable although the rising price of oil in recent weeks is creating headaches.

As the slump drags on, though, producers will have to secure longer-lived cost controls and lower-cost manufacturing positions that are likely to include more permanent shutdowns and some (permanent) layoffs.

KPMG makes the valid point that continued restructuring efforts are required, however, without neglecting development.

Difficult times these may be but producers need to be ready to capitalise on any upturn in demand and, more importantly, have the technical and employee know-how available to seize new-found market advantages.

($1 = €0.71/£0.61)

To discuss issues facing the chemical industry go to ICIS connect
Read Paul Hodges’ Chemicals & the Economy blog

By: Nigel Davis
+44 20 8652 3214

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly