Chemical Sales, Capital Spending In A Weaker Oil-Price World

Business, China, Company Strategy, Fibre Intermediates, Oil & Gas

Top100Jan2015

By John Richardson

THE above chart shows the top 23 of the latest ICIS Top 100 ranking of global chemicals companies by sales in US dollars for 2013.

When the 2014 numbers have been fully compiled and released later this year, some targets sales growth might well be missed.

“We never imagined that the oil price would fall to $60 a barrel, never mind around $50 in 2014,”said a source with one global chemicals company.

Sure, lower input costs should boost profitability, assuming that demand growth is robust enough,

But the problem on sales is as follows:

  • A chemicals company that had expected, say a turnover $70bn a year, suddenly finds that its turnover has fallen to $60-60bn a year because of the declines in oil and therefore chemicals prices.
  • But overheads and loan commitments are still predicated on the $80bn a year target.

What is even more worrying is that several companies I have spoken to think that crude will bounce back to $70-90 a barrel by the end of this year. What happens if oil prices keep on falling or, at the very best, remains roughly where it is today?

Any company that has assumed significantly stronger oil prices later this year will in response have set targets for sales growth in 2015 that could also be missed.

The answer? Make cost saving ahead of the storm of missing 2014 and 2015 sales targets, which I hear has already happened at several companies. Headcounts have been reduced and other expenses cut, including travel.

Long-term capital expenditure is also being cut by both chemicals and oil, gas, refining and chemicals companies. Here the problem seems to be returns on investment that now look significantly lower because of the declines in crude.

This applies to Shell, as my colleague Nigel Davis said in another of his excellent Insight articles

He wrote yesterday: The first petrochemical project casualty of the oil price crash came on Wednesday with Shell and Qatar Petroleum’s announcement that their planned $6.5bn cracker complex at Ras Laffan in Qatar would not be built.

“Qatar Petroleum and Shell have decided not to proceed with the proposed Al Karaana petrochemicals project, and to stop further work on the project,” the companies said.

“The decision came after a careful and thorough evaluation of commercial quotations from EPC (engineering, procurement and construction) bidders, which showed high capital costs rendering it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” they added.

The project was to include 1.5m tonne/year of monoethylene glycol production capacity alongside the cracker as well as oxo alcohols and linear alpha olefins units.

Shell CEO, Ben van Beurden, has focused the company more on the competitiveness and affordability of its investments and sees this period of low oil prices as a critical challenge for 2015.

“I still believe that we will see a return to higher oil prices, and therefore I also think that our long-term planning is still correct,” he says in a question and answer article published on the energy company’s web site.

“That’s not so much the problem. However, the lower oil price reduces our income and we consequently have less to spend, which could become a problem. We configured part of our investment programme based on the oil price being around $90. So if the oil price remains low for a few years, the programme will come under pressure.”

Still, though, once we get through this storm – and as companies such as Shell have long pointed out – the long-term opportunities remain nothing short of fantastic.

PREVIOUS POST

Indonesia: Seize The Day

14/01/2015

By John Richardson IT WAS criminally wrong. Yes, criminally wrong. Financial spe...

Learn more
NEXT POST

Asian Polyethylene: Inventory Losses Threaten Survival

16/01/2015

By John Richardson HERE are some observations, from several discussions with mar...

Learn more
More posts
Why a new stimulus deal could be critical for US polyethylene demand
11/08/2020

By John Richardson GOVERNMENT stimulus is crucial for protecting polyethylene (PE) markets in the We...

Read
China’s shift towards styrene self-sufficiency adds to pressure for new petrochemicals business model
09/08/2020

By John Richardson IT IS dead simple, apparently. All you have to do is find alternative geographica...

Read
Why a hard look at the data show China has not seen a V-shaped recovery
06/08/2020

          Note: All the data comparisons below are year-on-year By John Ric...

Read
China moves closer to Iran as tensions with the US build: Implications for petrochemicals
02/08/2020

By John Richardson Opinions and emotions and can shape how we interpret data, but, as we all know, o...

Read
China polyolefins market H1 review: so far so good, but beware of the risks ahead
30/07/2020

By John Richardson ALL looks fine in the polyolefins world. The Old Normal appears to have reasserte...

Read
Polyethylene market recovery could be threatened by slower China crude buying, weaker economic growth
28/07/2020

By John Richardson EVEN by China’s standards, where just about every number is eye-wateringly larg...

Read
Why the polypropylene industry must switch from volumes to value
26/07/2020

By John Richardson EVERYONE knows about the oversupply in the polyethylene (PE) market as it has bee...

Read
China consulate closure underlines long-term split with US, potential big shift in petchems trade flows
23/07/2020

The views in this blog post are, as always, my personal views and do not reflect the views of ICIS. ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more