INSIGHT: Prepared for a tough, long haul

05 August 2009 17:35  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Looking beyond the current slump is difficult to say the least but companies have to be ready for what comes next.

Near-term visibility is limited and the medium-term view is clouded. In polyolefins, however, the forward view is more distinct. The past is another country.

Coming out of the recession producers know that years of demand have been lost. Consultants AMI estimate, for example, that thermoplastics demand dropped in Europe last year by 8% from a 2007 peak of 41m tonnes. They are projecting a further demand decline this year of between 4% and 5%.

Those numbers, of course, relate to polymers of all sorts but they are indicative of market collapse in 2008 and the struggle faced by all parts of the plastics industry in 2009.

The big polyolefins have been hit hard, commodity grades particularly. Even consumables have taken a turn for the worse as consumer and industrial spending has been reined in.

The positive news is that de-stocking appears to have reached a low point and that, while demand is more hand-to-mouth, there is some life in the business.

But that by no means indicates a return to reasonable profitability.

That is not likely until 2011, analysts suggested earlier this year. Nothing really has happened since to counter that view.

The current recession has forced profitability down to very low levels. Even Borealis, a polyolefins maker with an increasingly strong foothold in low-cost polymers production in the Middle East, does not expect an upturn within the next 18 months.

“We believe that we are looking at an 'L' shaped recession and we are bouncing along the bottom [at the moment],” Borealis CEO Mark Garrett said in an interview with ICIS news on Tuesday.

“It could be that we could see another difficult quarter or two,” he added.

Borealis does not expect an upturn until the end of 2010 but Garrett wants “solid financial results” in 2011, the year after its huge Borouge II joint venture cracker and downstream plants come on stream in Abu Dhabi.

Between now and then, however, Borealis, and other polyolefins producers, face an uphill battle.

Contending with the recession is one thing. For some players and their production sites, surviving the aftermath is another.

New production capacities - the low-feedstock-cost plants in the Middle East and new assets in Asia - will have a significant impact on the business.

Operating rates for higher-cost facilities will come under pressure. The weakest on the cost curve will be under closest scrutiny.

Yet companies have been preparing for this period for years and continue to do so. Older, higher-cost plants have been closed and operations focused on robust sites. Entire companies have, by necessity, been readied for bottom-of-the-cycle conditions.

It is the additional pressure brought about by the recession, however, that still gives greatest cause for concern.

There is so much talk of the end of de-stocking and of the pull of China demand, that sight has been lost of the current atrocious fundamentals.

There is very little underpinning the business other than the pull from China. Should that stall for whatever reason then (financial) recovery will be hit.

China demand has buoyed the polyolefins business in Asia and North America for a large part of this year but it is still only a lifebelt for these businesses.

China imported 3m tonnes of polyethylene and 1.5m tonnes of homopolymer grade polypropylene in the first five months of the year, the volumes up almost 50% and 36% respectively.

Prices for both polyethylene (PE) and polypropylene (PP) have been pushed higher as the balance of supply and demand has shifted, but the movement has in Europe been due to reduced supply as opposed to stronger demand.

Large volumes of both PE and PP were exported in the first half of the year, particularly in the second quarter, helping to support the weak European market.

Not much has been seen yet in Europe of product from new facilities which have come on stream this year. Growing China demand has probably seen to that.

But the market awaits the arrival of new volumes through this year and next with some trepidation.

The new volumes, even if they don’t have a direct impact on domestic European or North American markets, are likely to take away exports.

And it is the loss of those opportunities that will put further pressure on already stressed, relatively high-cost businesses and assets.

It will be tough having to wait for domestic customer markets to improve while the battered manufacturing economy struggles out of recession.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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