Corrected: INSIGHT: The year of the force majeure

12 July 2011 17:06  [Source: ICIS news]

Correction: In the ICIS news story headlined “INSIGHT: The year of the force majeure” dated 12 July, 2011, please read in the 10th paragraph … Of 10 companies that have declared forces majeures in the US this year, seven have stock prices that are near their 52-week highs: BP, Celanese, Dow Chemical, Enterprise, PPG, Shell, Sunoco … instead of … Of 11 companies that have declared forces majeures in the US this year, eight have stock prices that are near their 52-week highs: BP, Celanese, Dow Chemical, Eastman Chemical, Enterprise, PPG, Shell, Sunoco…. A corrected story follows.

By Lane Kelley

HOUSTON (ICIS)--This is the year of the force majeure, judging from a recent study by a stock research firm in London.

A 15 June report from BernsteinResearch, part of Hong Kong-based AllianceBernstein, put a number on the phenomenon.

Based on news stories in the trade press (many in ICIS), the report quantifies in various lists, charts and graphs how the number of forces majeures declared in the first two quarters this year give the first half of 2011 the highest total for any first two quarters in the past decade.

Written by a team of analysts led by Jeremy Redenius, the Bernstein report lists 37 forces majeures in the US and Europe during the second quarter this year, and a version of the report in April listed another 31 forces majeures in those regions. That adds up to 68 forces majeures through the middle of June - almost three a week.

A high number of the force majeure declarations came in the benzene, toluene, xylene and propylene chains in the US this year.

The report says most of the forces majeures resulted from mechanical problems. “We have found that technical issues, possibly arising from under-maintenance of assets, have been the primary cause of FM [force majeure],” it adds.

The US has seen a sharp rise in such declarations in the latest quarter - 12 in the second quarter, according to the Bernstein report, or almost one a week.

Meanwhile, forces majeures in Europe have declined. Overall, the number of forces majeures in the second quarter was not quite as high as in the first, but still higher by far than any quarter in the past three years, surpassing what the report terms “pre-crisis” levels, meaning before the third quarter of 2008 when the global financial crisis struck.

The preponderance of forces majeures this year in both the US and Europe serve as an indicator of market tightness and correlate with high petrochemical margins over the past decade. Whenever the number of forces majeures goes up, so do petrochemical margins, the report says.

My own quick survey of public chemical companies on the Bernstein list also confirms that forces majeures have been profitable for some firms. Of 10 companies that have declared forces majeures in the US this year, seven have stock prices that are near their 52-week highs: BP, Celanese, Dow Chemical, Enterprise, PPG, Shell, Sunoco.

So more forces majeures, from a producer point of view, mean higher petrochemical margins, and higher margins should translate into higher profits. Or at least they do for the producers who declare forces majeures and turn them into higher margins and profits.

Why so many forces majeures have been declared in the chemical industry during 2011 seems a pertinent question.

Buyers will always complain about producers faking it, about so-called “faux majeures,” although a US CEO clearly had a point earlier this year when he said that the definition of the term no longer has much to do with an act of God or an event beyond human control, as it was once understood. And chemical buyers do tend to see things differently from producers.

A buyer at a large chemical company said the Bernstein study only proves that margins are higher when the market is tight and that companies are not doing proper maintenance at their plants. “Nothing more,” the buyer said.

The buyer said the Bernstein study raised some obvious questions, though.

  • Why are companies delaying maintenance, or are they simply closing their eyes to production problems that can become greater?
  • Why isn’t there a government office or authority that can control plant maintenance or penalise the company that is not controlling its maintenance?
  • Why are we seeing the same companies declare several forces majeures, and why have other companies not had any problems?
  • Has force majeure become just a tool to increase margin?
  • A company under force majeure should, legally speaking, disclose all plant problems to authorities - is this really being done?

The force majeure craze this year has spawned some bizarre events, to be sure, such as a force majeure declared at a Houston-area plant late in the week during June that only days later was said to have been corrected. So maybe it was just a force mineure?

Whatever the case, all things must pass and the Bernstein report says current higher margins and profits should start coming down in 2012. Producers will want to end all the questions about what is working or not working at their plants. But putting everything back to normal will have a cost.

“In the long run, we expect some relief as companies have the incentive to invest in maintenance and de-bottlenecking,” the report says.

“We expect operations to normalise over the next two years since companies have the incentive to improve reliability again, which could lead to gradually declining margins.”

Paul Hodges also looks at the force majeure phenomenon in the latest posting on his ICIS Chemicals & the Economy Blog

By: Lane Kelley
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