INSIGHT: Evolving world of threats provides no rest for chem firms

18 January 2012 16:06  [Source: ICIS news]

By Franco Capaldo

Japan quake, tsunami aftermath in FukushimaLONDON (ICIS)--In an evolving world, no one can predict the future; we can only learn from the trends and errors of the past and prepare to be ready for any pitfalls that might come our way.

European chemical companies share the same position. Other than having a good insurance policy, decision makers - responsible for the strategies companies implement - must have in place contingency plans for when they are faced with risks that are impossible to avoid.

And it is not just the risk of further economic headwinds like recession and debt crises which companies must prepare for. Threats to chemical companies also come in societal, geopolitical, environmental and technological forms.

Of course, it is near impossible to guess where, when or in what way a crisis will hit, and with only a finite number of resources, it is impractical to think chemical companies can prepare for an unlimited number of eventualities.

However, groups can look at what sort of disaster would affect them the most and the likelihood of such risks, and spread their safety nets accordingly.

In London last week, the World Economic Forum released its Global Risks 2012 report, based on a survey of 469 experts from industry, government, academia and civil society, which examined the perceived impact, likelihood and interconnectedness of 50 global risks that could develop over the next 10 years.

It warned that the world’s vulnerability to further economic shocks and social upheaval risk undermining the progress that globalisation has brought.

"Across every sector of society, decision-makers are struggling with the complexity and velocity of change in an increasingly interdependent world," said Klaus Schwab, founder and executive chairman of the World Economic Forum.

"[The Global Risks report] aims to improve public and private sector efforts to map, monitor, manage and mitigate global risks," he added.

"An important aim of Global Risks 2012 is to help decision-makers evaluate complex risk events and to respond proactively in times of crisis," said Lee Howell, managing director of the World Economic Forum's Risk Response Network.

Unsurprisingly, the World Economic Forum said the economic risks of chronic fiscal imbalances; the failure to redress excessive government debt obligations; and severe income disparity, the widening gap between the richest and poorest citizens, were the two most likely risks to manifest themselves in the coming 10 years. They are rated as having "potentially high impact".

The financial implications of further economic decline is something all companies in the European chemical industry are now well aware of and should have been preparing for. Sentiment in the petrochemicals market, particulalry, deteriorated significantly in the second half of 2011, as fears of a ‘double-dip’ recession worsened following the slowing down in demand from key end-user markets for chemicals, such as the automotive and construction industries.

Within the next two months, European chemical companies will release their fourth-quarter and full-year financial results. It is likely that profits were hit hard by global economic uncertainty and widespread industry destocking, as well as continued volatility in raw material and energy costs.

The World Economic Forum report also identified the threat of extreme volatility in energy and agriculture prices, where severe price fluctuations could make critical commodities unaffordable, and slow down industries' growth, as one of its 50 major risks to be aware of in 2012.

There is also a good chance that most chemical companies will be bearish when it comes to their outlooks for performance in 2012. Some might even announce new more-defensive strategies to weather another turbulent economic storm.

Already in the second half of last year, many of Europe’s big chemical groups, including German major BASF, French specialty chemicals firm Arkema and Netherlands-headquartered AkzoNobel, unveiled strategies to restructure underperforming parts of their portfolio to strengthen competitiveness.

The unforeseen consequences of regulation - or regulations which do not achieve the desired effect, and negatively impact industry structures, capital flows and market competition - are also risks that threaten the chemical industry. The report added that for regulation to strike the right balance – "neither so lax they fail, nor so strict they carry harmful consequences – we need a more flexible, forward-looking approach".

"Existing processes for setting regulations tend to focus on specific industries, sectors or actions, and are often over-complicated, inadequate, fragmented and slow to respond to the accelerating pace of global change. A shift in mentality is called for, so that policies, regulations or institutions can offer vital protection in a more agile and cohesive way," the report said.

The chemicals, plastics and rubber industries already operate in a challenging regulatory environment and policy dictates the European market's success and competitiveness against the rest of the world.

The correct implementation and enforcement of regulations will not only be of high significance for the achievement of health and environmental objectives demanded by EU legislation. It is also vital to allow Europe to retain competitiveness in a growing chemicals market in which it is rapidly losing share, especially to the fast-expanding economies in Asia.

The report also pointed to potential environmental and geopolitical risks. Persistent extreme weather and unprecedented geo-physical destruction, such as that wrought by earthquakes and other natural disasters, could overwhelm existing precautions. The threat of international disputes escalating into armed conflicts and unilateral moves by states to ban exports of key commodities, stockpile reserves and expropriate natural reserves is very real.

No matter how balanced your books are, no company could have foreseen the negative impact of last year’s east Japan earthquake and subsequent crisis at the Fukushima nuclear plant, or in fact predicted the rippling effects and outcome of the Arab Spring.

Meanwhile, on a technological front, with all businesses now almost entirely dependent on connected online systems, companies in the future are increasingly susceptible to cyber attack by malicious groups or individuals, the report said.

It also highlighted risk associated with unintended consequences of using nanotechnology: "The manipulation of matter on an atomic and molecular level raises concerns on nanomaterial toxicity," it said. An appropriate regulatory framework remains essential for the sustainable development of nanotechnology, the potential and safety of which is still-relatively unknown.

It is a tricky, near-impossible task for the heads of chemical companies to predict how the world will change in 2012 and beyond but, with the right amount of understanding and planning for the threats that are likely to occur, firms will be in the best position to respond to global threats.

If the European chemical industry as a whole communicated and shared a greater transparency over potential risks, it would improve a company's chance of mitigating negative situations.

By: Franco Capaldo
+44 (0)20 8652 3214

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