In the depths of the Asian financial crisis an American industry executive said, “I don’t know why Korea has a petrochemical industry. It should be just shut down.”
There were also widespread complaints over “soft” government-directed loans that supported Asian companies through the difficult times of 1997-98.
How the tables have turned, according to another senior executive of a Western company who spoke recently about the current crisis.
“The bedrock of the US economy has been oil, natural gas, refining and petrochemicals,” he said.
“A lot of industry people think that if you allow plastics and petrochemicals to go you might as well also let the big automakers collapse.”
So could these attitudes be sufficient to win government support for some of the distressed chemicals companies in the US?
Will this impede restructuring that should take in place in order to make assets and businesses globally efficient?
Or will global efficiency matter as much as it used to if trade barriers rise – and if the need to buy locally to preserve cash becomes an entrenched way of doing business?
High leverage is out – surely for many years. When new projects are again being seriously assessed, more equity and less debt will be needed.
What will this mean for the private equity model? Some argue that low asset valuations will lead to a resurgence of private equity. But access to complicated lending markets will likely no longer be an option as these markets have virtually ceased to exist.
The smart chief financial officer with good connections to the finance industry might become of less value than the day-to-day operations managers – including clever chemicals engineers who can maximise the efficient running of plants.
“We also need new ways of assessing demand growth. We will continue to confront the problem of timing capacity additions, but we have to adopt fresh thinking, including a wider range of scenarios to stress-test our assumptions,” the second executive added.
“These approaches should involve methods of more effectively anticipating macro-economic shocks.”
These are the big issues you can ruminate over while enjoying a beer in the evening. More pressing, though, is how to get through this crisis.
Speciality chemicals players and other end-users of commodity chemicals are in strong purchasing positions after years of being squeezed by tight upstream supply and demand balances.
They are beefing up their business analyst teams to more effectively monitor markets, according to several sources in downstream companies.
Senior executives are also being asked to monitor pricing markets in an effort to spot short-term money-saving opportunities.
All purchasing decisions are going through top people as part of the struggle to preserve credit.
So if you are selling basic chemicals you too need to beef up your business analysis capabilities in order to counter much better customer intelligence. This is no easy task with budgets under so much pressure.
Your sales and marketing teams will also need to have exceptionally convincing stories to tell – as they could be talking to the very-wise who have heard it all before.
Scrambling for every extra dollar will be crucial for the highly leveraged commodity chemicals companies as they struggle to stave-off debt defaults.
This scramble for cash is not being helped by a faltering petrochemical-price recovery. Ethylene, propylene and aromatics prices were on the retreat in Asia during the week ending 20 February, according to ICIS pricing.
Those with new plants in the Middle East will not have any problems in servicing debt. “Even if ethylene fell to $200/tonne they would still make money,” said a consultant.
But the Middle East players are facing tough times as new plants on a stand-alone basis will be generating a great deal less earnings than had been forecast.
Higher capital costs and different feedstock mixes were always going to make this round of building less competitive than the last. A further dent to profitability is the collapse in oil prices, eroding the advantage over naphtha-based producers.
The western petrochemicals-only players face an added problem.
Those back-integrated to refiners might have to repeatedly sell petrochemical and polymer inventories at very competitive prices in order to keep big complexes balanced.
The greater your integration the more chances you have of generating decent overall returns.
A bigger percentage of gasoline and diesel consumption is less discretionary than many of the petrochemicals that go into durable goods – hence, one of the advantages of also being in the refinery business.
Lower gasoline prices have also prompted a slight demand recovery in developed markets. Asian demand growth is also likely to remain positive this year.
Distressed sales of petrochemicals and plastics have always happened but could now occur more frequently because of the difficulty in reading markets.
Preserving value in innovation is a further challenge for the solution providers.
“It’s about explaining that cheap doesn’t always equal value for money. One possibility is that there could be a flight to quality if we can make the right case,” the second executive added.
But will premium grades always carry the premiums needed to keep some of the heavy betters on innovation going?
A lot of sophisticated chemicals and polymers – supported by value-added customer service – go into end-use sectors such as electronics and autos.
Here is another big question to ponder over a beer: Will rising protectionism make it easier for Western chemical producers to preserve their share of domestic markets?
The downside is that trade barriers, whether formal or informal, could make it harder to further outsource – and to move whole operations to emerging markets – in the battle to reduce costs and capitalise on stronger growth.
It’s incredibly tough out there for those trying to hit sales targets – even if they are being constantly reduced to meet the worsening business environment.
The danger is that if senior people spend too much time focusing on sales and cost targets, strategies to deal with the big issues will never be drawn up or put to adequate test.
This could result in gains from smart short-term management being lost during the next cycle.