FocusHigh lending costs threaten project finance
26 September 2008 14:35 [Source: ICIS news]
By Hilde Ovrebekk
LONDON (ICIS news)--Increased project financing costs could pose a threat to long-term investment and development in the chemicals industry, particularly in the US and Europe, an adviser said on Friday.
“Longer-term, the whole area of project financing could be put into question,” said John Morris, global chairman for chemicals and pharmaceuticals at KPMG.
“The market is pretty illiquid. New project requests certainly will be more expensive,” he added.
Lending availability of international banks had already been hit before the crucial fall of investment bank Lehman Brothers, followed by the takeover of Merrill Lynch by Bank of America and the rescue by the US government of insurance giant American International Group (AIG).
The three-month London interbank offered rate (Libor), the rate banks charge each other to borrow, jumped from a recent low of 5.7% to 6.28% on Friday, as confidence between banks in their ability to pay back loans has diminished.
This was bound to affect the cost of lending to larger projects and would potentially have a detrimental effect on project finance in the chemicals industry.
Large projects are already disadvantaged because the costs of construction materials such as concrete and steel are rising and high-cost estimates have forced the cancellation of some.
Engineering, procurement and construction contractors that focus on the chemicals industry are also keeping a close watch on developments following the shake-up in the financial markets.
“We cannot anticipate this now, but we will be watching it over the next year,” said Andreas Beckers, head of corporate communications at Germany's Uhde.
He said the company was still on track to finish the year at a record high, but that if the current financial climate continued this may change for companies involved in projects in the chemicals industry in the longer term.
The global credit crisis has already raised questions on the future of petrochemical projects in the Middle East, from where Uhde derives 50% of its business.
Morris said we were entering a period of turbulence and that the normal economic trend was for it to last for one to two years. Although this time it may err on the upper side of the timescale judging by recent events in the financial markets.
The current financial crisis is mainly affecting the US and European markets, Morris said, adding that “there is a lot of cash in Asia".
The question then would be where, longer-term, this would leave the European and US chemicals industries.
“It will only go to exacerbate the debate of the competitiveness of the chemicals industry,” said Morris.
On Friday, central banks in Asia provided dollar and local currency liquidity, the US Federal Reserve said it was expanding its currency swap operations with the European Central Bank and Swiss National Bank, and the Bank of England said it would extend its dollar liquidity provisions in attempts to ease the financial crisis.
Federal bank regulator Office of Thrift Supervision (OTS) said Washington Mutual (WaMu) had been sold to financial services giant JP Morgan Chase & Co for $1.9bn (€1.29bn) after it was seized by the US government.
Last week, UK bank Lloyd's TSB agreed to take over the country's largest mortgage lender HBOS in a controversial deal which put questions forward about future competitiveness in the banking industry and the possibility of higher lending costs.
Meanwhile in the US, political talks on a possible $700bn bail-out of the country's financial industry ended without agreement.
($1 = €0.68)
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Author: Hilde Ovrebekk+44 20 8652 3214
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