Difficult times call for tough decisions

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Downturns are difficult times. There is always the hope that markets might improve, and this can delay the implementation of tough decisions on plant closures. Nobody wants to shut down, and then see a competitor benefit from an improving market.

But if markets do stay depressed, then precious cash is being wasted whilst plants operate at a loss. This can put other businesses at risk. So it is important to get the balance right. There are no easy options.

The position of LyondellBasell is particularly difficult. It became the largest-ever chemical company bankruptcy in January (with $26bn of debt), and Lyondell Chemical is now operating under Chapter 11 rules. This has already given rise to major legal issues, as different sets of creditors fight for their position.

This led to a worry that financial and legal issues might over-shadow the equally essential need for major business restructuring. Therefore it was very positive when the company announced it was appointing a COO to consolidate management of the worldwide businesses, including its manufacturing divisions.

Ed Dineen was also an excellent choice for the role, given his extensive industry experience and understanding of the LBI businesses. Since October, when the blog published its 2009 Outlook, ‘Budgeting for Survival’, it has been clear that we were facing one of the worst crises in the industry’s history. It is important in these conditions for management to lead from the front, and be open and honest about the problems.

It is also critical that implementation is effective. Since Dineen’s appointment was announced, the company has confirmed a target of 4800 job losses amongst employees and contractors, plus the closure of 14 plants, with around half of these already underway. The aim is to achieve $700m fixed cost savings by year-end 2010, with a further $600m of savings targeted by other business improvement measures.

The blog knows and respects many LBI employees, and is saddened by these job losses. But as Dineen noted yesterday, “March and April have not given indications of any significant change in market conditions.” In these circumstances, delaying the inevitable would be an abdication of responsibility.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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