INSIGHT: Chemicals makers must show response
03 November 2008 16:51 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS news)--No-one much likes the chemicals industry just now. Dire warnings of a sharp global downturn, or a deepening global recession, whichever way you want to look at it, bode ill for the sector.
When global (economic) growth slows, all chemical companies are hit. The hard brake put on global industrial activity in past weeks hits the sector disproportionately hard.
The critical question is just how much more significantly chemical firms are likely to be affected by credit crisis and recession than others.
Some idea can be gleaned from the current spate of earnings results.
BASF is always cautious and analytical in its approach so the warning of an extremely challenging business environment for the company is worth noting.
Financial analysts have, not surprisingly, significantly downgraded this most broadly based chemicals maker.
BASF is facing a decline in demand in important markets, customer stockpiling and a fall in oil prices, says CEO Jurgen Hambrecht. The BASF chief, along with the heads of other chemicals majors, warns of a sharpening recessionary trend.
Chemical companies should be more resilient to slowdown than in the past given the work that has been done to streamline day-to-day operations and reorient portfolios.
Over the coming months and quarters, however, all those past actions will be put to the test.
BASF on Monday said its offer to shareholders of specialty chemicals maker Ciba was unconditional. Ciba will go some way, over the longer term, towards making BASF’s earnings more resilient to chemicals cyclicality, but is not likely to be of much of much help over the next 12 months.
By the same token, Dow’s push closer to ostensibly more stable and stronger market-facing businesses though the proposed acquisition of Rohm and Haas and creation of the K-Dow petrochemicals venture can have little immediate impact.
To address the immediate concerns, companies will have to accelerate planned cutbacks and look for where more costs can be trimmed.
BASF said also last Thursday that it was responding to declining demand by adjusting capacity utilisation rates and bringing forward maintenance-related shutdowns.
It is one of the global caprolactam makers, for instance, that has significantly cut back production due to weak demand from the automotive and textile industries.
The focus of BASF and others has to be on operating cashflow. Hambrecht says BASF is concentrating on improving efficiency and sustainability.
“The months ahead are likely to bring many extraordinary challenges for our business and hardly any positive impulses,” he adds. The company’s full year 2008 outlook has to be more cautious.
BASF likes to think it is a chemical industry “benchmark” in terms of operational effectiveness. It has cut costs in the US and Europe by a full €1.4bn ($1.8bn) a year over the past five years and is rolling its experience out globally.
It has also, however, launched a new excellence programme, NEXT, that it has been working on since the beginning of the year. NEXT and it was rolled out in October.
NEXT is applicable globally and in all division and functions and involves more than 500 individual projects which range from process simplification to new IT technologies.
“We are counting on NEXT to establish excellence in all areas of our day-to-day business,” Hambrecht says.
“We want to be able to act even more flexibly, faster and more decisively so that we can uphold our position as global market leader in the chemical industry despite the increased challenges we are facing.”
BASF is challenged, as is every other chemicals producer in this difficult and uncertain operating environment. NEXT is expected to cost the company €1bn and 1,000 jobs worldwide but to start delivering results in 2009 and 2010.
No-one can tell how deep this recession is likely to be or gauge the extent of the impact on chemicals but there can be little doubt that 2009 is going to be hard.
At the moment chemicals companies are being marked down because of their clear exposure to uncertainty, providing more evidence that they are able to meet the challenges will stand them in good stead.
($1 = €0.78)
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ICIS Copyright © Reed Business Information 2009
Author: Nigel Davis+44 20 8652 3214
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