INSIGHT: Reality hits home as majors look to second half

30 July 2009 16:21  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--“We don’t see any reason to expect the second half to improve compared with the first half. It could be weaker,” warned BASF CFO Kurt Bock on Thursday.

Dow CEO Andrew Liveris was equally downbeat: “Our 2009 operating plan does not count material improvements in market conditions for the remainder of the year," he said.

Both, in effect, are telling it like it is.

“In our view, the US economy has found bottom, but will be slow in recovering as unemployment continues to be a drag on consumer spending,” Liveris said in Dow’s second quarter earnings statement.

“The economic outlook for the rest of 2009 appears to be stabilising with strong growth in Asia Pacific, especially China, where domestic stimulus programmes have stimulated demand,” he added.

But BASF board member, Martin Brudermuller, made the strong point that the company does not expect a further increase in business in China in the second half.

The chemicals giant has seen stronger chemicals volumes but thinks demand is firmly rooted in government infrastructure and other stimulus related projects. As those lose steam, it is not certain that underlying demand will be maintained.

Through this results season, so much is being made of sequential volume gains and sales lifted by stronger pricing that a central message is being lost.

It was stressed by BASF earlier on Thursday and by Bock in a conference call. BASF, the broadest based chemicals manufacturer, expects global chemicals output to fall by 8% this year. This means that by the year end production will be back up to 2005 levels.

The industry will have lost three years of growth.

It is a question then of how swiftly business returns and in what markets. A bounce back currently seems hardly likely. Companies must expect to struggle to gain additional volumes.

They will gain those volumes through broadened portfolios: both in terms of products and geography. As customer industries emerge from recession they will be seeking out improved offerings and new products. Often they will be seeking those offerings either from, or in, new geographies.

Producers militate against the worst impacts of the downturn through a relentless focus on costs and productivity. They reacted swiftly to the onset of the recession in manufacturing by running output down and reining in costs of every kind.

Like their counterparts in other sectors, and especially major customers in construction, automobiles, and electronics they will only bring capacities back on stream cautiously when the time is right.

The downturn is prompting further chemical industry restructuring, both Dow and BASF talked about their styrenics businesses on Thursday. Dow said it had put aromatics and styrenics into a new unit that it would be prepared to sell.

Output generally is still severely depressed. BASF said it was operating at just above 60% of global production capacity in the second half – it had been operating at just below 60% in the first three months of the year. Normally the company would be running at 80% or more.

The impact of the recession has been widespread and deep. There is so much talk about the apparent end to de-stocking but inventory levels are still low. BASF said that its customers were ordering at very short notice and only in small volumes. The inventory situation is opaque. There are no reliable figures.

This all adds to the lack of visibility for companies struggling to gain momentum coming off the bottom of the downturn. Financial analysts and others are poring over the current slew of results looking here and there for signs of a gain.

Certainly, there is some encouragement to be had. Dow has shown sequential volume gains in its electronic and speciality materials, coatings and infrastructure and performance systems segments and basic plastics volumes were higher.

At BASF the volume declines in chemicals and plastics were not as bad in the second quarter as they had been in the first. The company, however, is finding the going hard as it integrates businesses from Ciba Specialty Chemicals.

Company specific issues aside, the reports from the two major broad based chemicals players on Thursday, as well as those from the two largest makers of petrochemicals – ExxonMobil and Shell – show that output remains depressed and suggest that recovery could take time. The outlook remains extremely difficult.

For more on BASF, Dow, ExxonMobil Chemical and Shell Chemicals visit ICIS company intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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