Special Report: ICIS Roundtable - How to cut - but keep momentum

13 October 2013 10:04  [Source: ICB]

Difficult times look set to continue for Europe’s chemicals sector. The European market remains sluggish despite efforts to revive GDP growth, and export opportunities are also diminished due to slower growth in major economies such as China, India and Latin America. As this year has progressed, it has become increasingly evident that business is not improving; indeed, the picture seems to be worsening.

Producers have responded once again by tightening their belts. But what more can companies do in the current climate? And how long will the current state of affairs have to be managed, if not endured?

How to maintain momentum while managing for the short term will be discussed at the ICIS/Booz & Company CEO Roundtable in Brussels on 25 October. Leading figures from commodity and specialty chemicals will take part, offering a chance to gauge just which areas are being hardest hit and what strategies are being brought to bear.

FALLING BEHIND

Recent figures from Cefic, the European Chemical Industry Council, show that Europe’s chemical sector is still suffering. Indeed, as a recent report from US analysts Euler Hermes concludes it is the laggard in global terms at the moment.

"There are no easy or obvious levers for chemicals companies to pull in 2013"

Richard Verity
Vice president - Booz & Company

The industry has not regained its pre-crisis production levels and is still operating at an estimated 8% below its peak in 2008. According to Cefic, chemical production in Europe declined by 2.1% in the first quarter of 2013 and this trend was gaining momentum in May, which was 2.5% down on the same period in 2012.

The reason, says Euler Hermes, is the poor performance of the petrochemical sector and persistent weakness in automotive and construction markets in the eurozone. Only agrochemicals are showing a robust performance.

Richard Verity, vice president at Booz & Company, concurs that global chemicals revenues retreated in 2012. Overall chemicals revenues fell by about 4.4% in the first half of 2012, and there was little turnaround in the second half.

Europe’s petrochemicals producers and plastics makers have borne the brunt of the slowdown. In a difficult second quarter, output was cut back in the face of weak demand and in attempts to shore up margins. EU petrochemicals output in April fell by 11.3% year on year. Plastics production was down 5.9%.

Business sentiment is not great either. Cefic’s chemicals confidence indicator was unchanged in May from April. Production expectations for the EU chemicals sector were even lower in May than they had been in April.

At the macro level, Europe is showing more signs of life but companies still have to plan to deal with the worst. The Markit composite purchasing manager’s indices (PMIs) for the troubled eurozone, continued to send out a positive message in September. “An upturn in the eurozone PMI in September rounds off the best quarter for over two years, and adds to growing signs that the region is recovering from the longest recession in its history,” said the research firm’s chief economist, Chris Williamson.

HIGH COST, LOW GROWTH

But while planning for at least somewhat stronger growth in 2014, chemical producers are having to continue to make cuts in Europe, which for multinationals is the high cost, low growth region.

The cuts have come upstream, for companies such as Dow Chemical and LyondellBasell, and are being made by smaller, downstream players. LANXESS has revealed its plans for cutbacks in the face of the downturn in the automotive and tyre markets. “Due to the current situation we must now take action,” management board chairman Axel Heitmann said.

Coatings producers AkzoNobel said recently that its current restructuring programme is on track and that the economic environment 
continues to be challenging. It will book €256m ($346m) of restructuring charges between 
October and December this year.

SABIC has also announced cutbacks in 
Europe, where 1,050 jobs will go. The cuts will be made from a European employee total of 6,000. In the Netherlands, where the company has its European headquarters and a number of chemical plants, 420 job losses are planned.

Such moves are typical of others across the sector. Says Booz’s Verity: “With the slowdown in revenues, some of the more agile chemicals companies have embarked on internal transformation programmes — restructuring their operations and making other adjustments to get their costs in line with lower expected revenue growth.” But he adds, “There are no easy or 
obvious levers for chemicals companies to pull in 2013. Success may well come down to a CEOs ability to look deep inside his or her organisation to find new sources of profitability. The question is how to do that.”

He argues there are several areas that can be addressed: make internal changes with a focus on growth; make strategic acquisitions that support key capabilities; explore new product markets — beyond the traditional chemicals/materials sector; reassess the Asia strategy; and adjust to the changing feedstock landscape.

You will be able to read the conclusions of the Brussels Roundtable in a forthcoming issue of ICIS Chemical Business.


By: John Baker
+44 20 8652 3214



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