Force majeures continue to increase

FMs Jul13

Companies have clearly been cutting capital budgets, in response to the slowing global economy.  That’s the only conclusion to be drawn from the blog’s 6-monthly review of force majeures, as reported by ICIS news.  They have been climbing steadily for months, and June saw them at twice the June 2012 level, as the chart shows.

This confirms the blog’s worries in Q1, when it seemed that maintenance spend had begun to be cut.  This is always one of the easiest targets for a cost reduction programme, as it usually takes time for the results in terms of reduced availability to become clear.  Equally, with demand slow, the loss of production doesn’t seem to matter as much as when plants are trying to produce maximum volumes.

The negative side of a slowdown in maintenance takes longer to appear.  But in the blog’s personal experience, it can be very damaging indeed:

  • Customers lose confidence in the supplier’s reliability
  • They may well cancel contracts, or demand bigger discounts to continue them
  • This leads to a vicious circle, where less cash is available for future maintenance

In addition, of course, there is the even more important issue of safety.  Lack of maintenance increases the risk of injury on plants – many of which are major hazard operations.  In turn, this can jeopardise a plant’s licence to operate.

Sadly, however, too many senior managements are currently ruled by the short-term outlook of the financial markets.  But they should look at top-performing companies such as ExxonMobil and DuPont.  These do not cut maintenance at the first sign of trouble.  And their long-term record highlights the benefit of focusing on the future, rather than short-term gain.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. 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.