Force Majeures continue to increase

Chemical companies, Economic growth

FMs Jul11.pngIts now a year since the blog first highlighted the worrying rise in force majeures (FMs) since the Great Recession began. Most disappointingly, continuing strong profitability has not led to any improvement. In fact, as the chart shows, the position has worsened over the past 6 months.

It is based on the number of FM mentions in ICIS news each month since 2008. Clearly, the Japan Disaster did increase the numbers. But at the peak in March, this added 20 within a total of 78 reports, since when the monthly numbers have been very small.

Many in the industry are worried by the FM trend, which has implications for safety performance, as well as for profitability. They point to lack of maintenance as a crucial factor, particularly when many Western plants are already ageing, and so are more difficult to run reliably.

As the Head of the UK’s Health & Safety Executive has noted, “At the most senior levels, there has been a growing lack of understanding and appreciation of the importance of process safety. Lagging indicators have taken the place of real-time measures of process safety and performance, while information technology has bred a sense of complacency.

In addition, of course, the trend towards larger-scale plants means any problems have a bigger impact. Whilst price volatility, and today’s relatively high prices, mean inventories are generally lower than in the past, and less able to buffer outages.

The blog is therefore pleased to see that analysts Bernstein Research have followed up the issue in greater detail. They highlight “a sharp increase in FMs in the US offset by a decrease in Europe“. And they share the blog’s view that “technical issues, possibly arising from under-maintenance of assets, have been the prime cause of FM“.

Bernstein also highlight the negative impact on profitability for those firms who suffer multiple FMs. Whilst they note that companies such as “BASF and Bayer continue to benefit from the operating issues of their competitors“. Hopefuilly investors may take note, and question managements more rigorously about their operating performance.

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