INSIGHT: Taking time to consider alternative futures

05 January 2011 16:07  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--In times of uncertainty it pays to try to understand the world better and to have options.

In his updated chemicals White Paper, published by ICIS on Tuesday, International eChem’s Paul Hodges says that companies would be wise to investigate alternative scenarios in their budgeting processes - not just contingency plans but clearly different views of the way the world might develop.

Hodges raises valid concerns that chemical companies need to address as they try to prosper in a slower growth world and much changed global operating environment.

He talks about “budgeting for uncertainty” and refers to a difficult transition towards slower growth - or the “new normal” post the recession and the boom that collapsed with the financial crisis.

Chemical companies have become remarkably adept at operating at subdued levels and at keeping a tight rein on working capital, so there are real dangers associated with growth. The high oil price has underpinned so much of the recovery in chemicals while demand growth has been focused on China and other emerging BRIC nations.

Hodges is rightly concerned that the rates of demand and output growth seen in 2010 are hardly sustainable. In the wider context, there are no quick fixes for financial crises. Recovery in traditional construction and automobile markets is uncertain, for example, and lies outside the business model of the world’s largest players. No-one is certain which way the market is headed.

Chemicals production growth in the Middle East, and demand and production growth in fast-growing China and India, demand close attention. The influence of the China market on the recovery has been clear for all to see.

New producers operating in these regions potentially are global giants but first and foremost operate to secure the development of national markets. They are fearsome competitors that are changing the rules of the game.

What might be the outcome as the influence of western publicly-held companies wanes and that of state-controlled chemicals "utilities" rises?

The economic and business models of the past 30 years are beginning to look their ages, Hodges suggests, and he warns of protectionism and the threat to free trade.

The chemical industry has operated for years in an expanding and expansive world, so how might company strategies develop to encompass a more restricted global market environment and one which is more regionally focused and differentiated?

It is very much a question of developing the tools to address uncertainty and, hopefully, to stimulate (internal) debate.

Companies should be wary of the "me too" approach which was so prevalent in the good times, when minor differences in performance mattered less.

It is a much more difficult world and one in which the drivers of growth are far less certain. “Just because something seems unlikely and unwelcome, does not mean that it can’t happen,” Hodges suggests. His views are open to challenge and debate, as are all others, but his warnings ring true.

Hodges posits a "base case" scenario and upside and downside variants. The base case slow recovery, aided by Asia growth, is contrasted with possible near-term futures within which western growth is stronger than expected and the oil price and inflation rises; and a scenario which considers slower-than-expected Asian growth, deflation and an oil price below $60/bbl.

“Everyone can draw up their own variants on this theme,” Hodges says. “The point is simply to have something that really challenges current strategies and asks ‘What would we do if this happened?’.”

Read Paul Hodges’ Chemicals and the Economy Blog
Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
To discuss issues facing the chemical industry visit ICIS connect

By: Nigel Davis
+44 20 8652 3214

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