INSIGHT: Looking for nothing more than a seasonal decline

29 October 2010 17:21  [Source: ICIS news]

LONDON (ICIS)--It is hardly a typical petrochemical company given its financial rollercoaster ride, but LyondellBasell’s operating performance mirrors recent market dynamics.

As for the here and now, industry conditions for October look reasonable, CEO Jim Gallogly said on Friday.

“We expect to see the typical seasonal impacts in the Refining and Oxyfuels area as well as end-of-year holiday reduced sales to some customers,” he added.

“With these anticipated impacts, our outlook for the quarter is somewhat tempered compared to the strong second and third quarters," he said.

That is the current sentiment across much of the sector, and across the wider chemical industry.

Most executives hope, even believe, that the slowdown is largely seasonal. Most would expect economic and industrial output growth to slow in the developed world in the coming quarters and for China and emerging market growth to ease.

It is the degree to which China’s demand for chemicals moderates and the restrictions to growth in the rest of the world that are so important to many, but not necessarily to all companies.

Petrochemical companies still have to carefully match supply with demand. Working capital has to be tightly managed: money and goods are not flowing through the system in the way that they once were.

But producers can feel a lot more comfortable running towards the end of 2010 than they have since the autumn of 2008.

The second and third quarters were particularly strong and the LyondellBasell results, along with other firms reporting this week, reflect that. Producer volumes and prices have been encouraging.

“We achieved excellent results in the third quarter as most of our segments performed very well," Gallogly said.

"Globally, our Olefins & Polyolefins results were approximately equal to the strong results of the second quarter. As a result, we again generated significant cash during the quarter and further improved our liquidity,” he added.

Cash generation is strong for many sector companies which have cut back on overheads and capital spending. Sensibly, the money is largely being used to reduce debts and improve liquidity.

There is the question of capital expenditure. Maintenance cap ex should not have been compromised during the downturn but some plants have been put under a great deal of strain as they have been pushed harder to meet rising customer demand.

Reliability and operability are a concern not just for producers when demand is running strong, but also for customers who fear a run-up in prices should some production fail. Parts of the industry still seem to be struggling to determine just how much sustainable supply is needed to match demand.

This reflects the uncertainty that dogs governments, businesses and individuals alike. Just what does the ‘new normal’ look like?

The latter part of 2010 is unlikely to tell. Moderating demand growth for chemicals and constrained operating rates appear to be the norm. Most of the industry is certainly not running on all cylinders.

In large part, profits are being made on price rather than on sustainable volumes and that has to be a concern.

For much of 2010, a volatile industry has been surprisingly stable and shown steady returns. It is far from certain that such a degree of sustainability can be maintained in 2011.

Bookmark Paul Hodges’ Chemicals & the Economy blog
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By: Nigel Davis
+44 20 8652 3214

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