Europe chems tailwinds can only last so long – banker

LONDON (ICIS)–The favourable external conditions that have buoyed many European chemicals firms through the weak macroeconomic backdrop of 2015 are likely to fade this year as producers face up to falling demand, according to a chemicals specialist at Lloyds Bank.

Downward pressure on pricing from the extreme falls in the cost of feedstocks such as crude oil and natural gas was negated in 2015 by the extent of the drop in value of the euro against the dollar, according to James Buckle (pictured top right), director and regional head of chemicals, commercial banking at Lloyds.

But volume-driven firms such as chemical producers need demand to underpin growth in the longer-term.

“The majority of these companies are highly operationally geared, lots of fixed assets, they’re volume driven, so they need to now adjust strategies to deal with potential reduced demand: cost-cutting, becoming much more efficient, but those two are actually finite elements in your equation,” Buckle said.

“What needs to happen is you need to become an innovator. Crisis can drive innovation, and at the end of that cycle you usually see the winners.,” he added.

Lower input costs and favourable currency exchange conditions buoyed European producers and galvanised exports, but momentum was starting to slow by the second year, with increasingly grim prognostications by luminaries such as BASF’s Kurt Bock.

“You could already tell [weakening sentiment] in company announcements and general sentiment, not only in chemicals but also in the broader manufacturing sector, that there was some general softening. Companies had already started to move into self-help mode,” Buckle said.

Buckle deals with lending to chemical and petrochemical companies, for operating expenses, project finance, and M&A activity. The business operates internationally, but Lloyds has its strongest foothold in Europe and the UK in particular and, with European firms currently focused on streamlining and increasing efficiency, and the larger-ticket acquisitions predominantly taking place outside the continent for the time being, the focus is currently more on operating loans and services, he said.

“From a product banking perspective, the majority of these companies are revisiting their business plans and from a pure-play financial perspective, they’re looking at whether their treasury policies are fit for purpose in this new world order, are they doing the right things in terms of dealing with foreign exchange exposure, do their policies allow them to do that? We’re helping them with that analysis and solidifying the broader conversation around the right conclusion.”

The focus at present is primarily on cost-cutting, meaning that the bank has diversified into offering services that help companies to examine their operations and streamline, without needing to borrow additional capital.

“On the operations/finance side, we try and help them with effective working capital solutions and try and find ways of them financing their capex without using their own money, through operating leasing, other solutions. I think efficiency and cost are the primary focus when we’re talking about self-help.”

Nevertheless, Buckle is anticipating an uptick in Europe-focused M&A activity this year, as innovation may be a way of strengthening profits down the line, but in the shorter term acquisitions are one of the only avenues available to achieving above-GDP growth.

“If you can innovate then great, that will deliver growth in the medium to long term, but M&A is the way to accelerate that process, and to buy some synergies, some new technologies, new end markets, so we will anticipate that this year and beyond.”

However, this spate of merger activity has yet to begin, he added.

“We haven’t seen any significant acquisition activity in this sector for our clients, so day to day running has been a main aspect.”

Players in Europe are currently waiting to see the impact that loosening of Iranian sanctions has on the market, from pressuring oil and gas prices further to unleashing a raft of low-priced polymers into the region.

Deals between European petrochemicals firms and Iranian companies are reportedly in the pipeline, and some parties expect a gold-rush akin to Russia following the fall of the Soviet Union.

However, Iranian producers are starved of capital and, with the situation on the ground in the country still fluid and US primary sanctions remaining in place, the floodgates of product to Europe may not be as quick to open as some onlookers expect, according to Buckle.

“I think it will be a little while before you see European lending institutions opening their doors to expansion capital in Iran, particularly in the chemical industry. I think it might be very challenging for a number of the players involved in that space until there is clarity of what the lifting of sanctions actually means,” he said.

“I think we’re a long way away from that, and more importantly with the depressed oil price, there is a limited appetite to invest anywhere in the Middle East at the moment,” he added.

Interview article by Tom Brown