Chemical Reaction

Not even demand from emerging nations and a rise in value can keep the chemical industry safe from the financial crisis. Muriel Axford reports.

The fall-off in manufacturing, construction and consumer confidence resulting from the financial crisis is having a huge negative impact on the global chemical industry. While there is a general awareness of the effect that the economic slowdown is having on sectors such as automotive or house building, the chemicals sector – the backbone of the much of the world's economic growth over the last two decades – has received less attention.

Unprecedented downturn

But chemical industry giants such as US-based Dow Chemical, Germany's BASF and UK-based Ineos are all experiencing falls in demand, profits and job losses that were unimaginable even just a few months ago. Market intelligence firm ICIS's Insight editor Nigel Davis said the scale and depth of the impact on the chemicals sector so far has been unprecedented.

"Producers of base chemicals that feed directly into the auto and housing sectors reported big drops in sales during the final quarter of 2008.

For example, DuPont, a big supplier to major manufacturing sectors saw a double-digit drop in sales for the fourth quarter of 2008. The company is not anticipating any positive change in its fortunes certainly for the first quarter of 2009 or even the second," Davis said.

Davis's summary of the situation is exemplified by Dow Chemicals CEO Andrew Liveris, who at the beginning of February 2009 delivered a downbeat assessment of the short-term outlook for his company.

During a presentation of the company's fourth quarter and full-year results Liveris said that "... In the second half of the year the financial markets unravelled and took with them consumer confidence. The rapid destruction of demand and unprecedented destocking throughout almost every value chain is something none of us has ever experienced. The impact of this global economic correction in the fourth quarter was inescapable and that is reflected in the financial results we recorded in 2008, with the fourth quarter being one of the worst quarters we have seen in more than two decades."

In response to this fall off, Dow cut its workforce by 11%, divested non-strategic businesses and shut down 80 facilities while at the same time idling 180 more.

As to the future Liveris added: "I wish there was more positive news to share. As each day brings more and more negative news on the economy and job losses, we are assuming that late 2008 demand levels will continue for several quarters and possible beyond. There are, however, a few bright spots in the markets that suggest there may be some recovery in the second half of the year."

An industry in decline

One of the bright spots Liveris refers to is the slight increase seen in the price of polyethylene during the early part of 2009. But Davis contends this is likely to be driven by local demand rather than any real sign of an improvement in the basic fundamentals. "A price increase of this nature could at this time indicate rushed demand allowing a producer to put a premium on prices," Davis said.

This view is also held by consultancy International eChem's managing director Paul Hodges. "A slight rise in polyethylene prices is not a 'green shoot' in my opinion," Hodges said. "We can only expect to see green shoots when we have hit the bottom, and I believe that we are still in the period of decline."

Hodges cites the huge stocks of cars and housing as evidence that chemical sector and manufacturing in general still has more pain to endure.

"This global recession will precipitate a 'sea change' in the way chemical industries operate."

"We have not yet got to a point where inventories are falling enough to prompt the kind of demand that represents a recovery. There may be pockets of local demand but not enough to justify 'green shoots' of recovery."

These pockets of local demand are likely to be in regions such as India and China but, as Davis points out, these export-driven markets are bracing themselves for an equally precipitous fall in demand.

"While we do not have much information on the status of jobs or plant operations in China we are hearing of civil unrest and large scale movement of people from industrialised regions back to rural areas as work inevitably dries up. There are concerns that as China's GDP is tipped to fall from 9% to 4% during 2009, this could lead to more domestic problems."

Other than the immediate impact on jobs and production, Hodges believes that this global recession will precipitate a 'sea change' in the way that the chemical industries, and many others, operate. "Like many other industries the chemical sector has benefited from the availability of cheap money resulting in the incredible volume of merger and acquisition activity we have seen over recent years. Servicing the debt mountains accumulated during that time will prove to be a major headache for some companies. Added to that, the falling value of assets, lower share prices and the difficulty in accessing credit we anticipate that the period of adjustment will be prolonged."

Suffering through loss

Among the list of companies that have had negotiations with banks in recent months is Ineos. In early December 2008 the company successfully negotiated debt covenant waivers with its major lender banks. The move was necessitated by the difficult trading conditions. Ineos has expanded rapidly in recent years, and in 2005 invested $9bn to buy BP's olefins and derivatives business Innovene.

Meanwhile, early January saw LyondellBasell Industries, the result of a $19.4bn merger between Lyondell and Basell completed during December 2007, and one of its European holding companies file for bankruptcy protection in the US.

Further pain was heaped on Dow Chemical at end of 2008. Not long after announcing massive job losses and plant closures, Dow's Kuwaiti joint venture partners decided to reverse their approval of an agreement between Dow and Kuwait's PIC to establish a 50:50 joint venture company called K-Dow. The venture would have become a leading global supplier of petrochemicals and plastics. Economic uncertainty is believed to have prompted the Kuwaiti reversal. Dow expected to receive $9bn in total pre-tax proceeds related to the transaction.

As companies get to grips with a new economic climate Hodges says the chemical industry, and many others, will have to begin taking a much longer-term view for growth and investment plans.

"The scale and depth of the impact on the chemicals sector so far has been unprecedented."

"For too long the focus has been on immediate results and rewarding this. But from the financial sector to the chemical industry, there is a sense that people will have to return to business models that take a much wider and longer-term look at growth and investment. There will be a shift in thinking. The idea that boom and bust was replaced with unfettered growth has been shown to be false."

The economic crisis has had enormous impact on jobs, profits and production capacity in the chemical sector. Below are just some of the major events impacting the chemical industry since the final quarter of 2008.

October 2008

  • Rompetrol, a Romanian oil refiner and chemical producer, cuts 2,000 jobs from a total of 9,000 as part of efforts to streamline it business.

November 2008

  • Spolana, a Czech PVC and caprolatam producer reduced production 50% and indicated that jobs and wages may have to be cut.
  • France-based Arkema plans to close 12 of petrochemical site worldwide.
  • Romanian plastics and pesticides producer Oltichim cuts 550 jobs.
  • Germany-based BASF issues a reduced full year profits outlook. Falling demand forces the temporary closure of 80 of the company's production plants worldwide.

December 2008

  • DSM, a Dutch chemical producer plans to cut 1,000 jobs.
  • Dow Europe plans to close styrene, polystyrene and ethyl benzene production at three of its 26 plants in Terneuzen, the Netherlands.
  • Sabic Innovation Plastics plans to cut 1,050 jobs from its global workforce during 2009.
  • Russia'a Novokulbyshevsk cuts 1,000 jobs and halts production at its isoprene unit.

January 2009

  • Swiss speciality chemicals company Clariant cuts 1,000 jobs and reports a 5% drop in sales for the full-year 2008.
  • US-based Huntsman cuts 1,175 jobs and closes its titanium dioxide plant in the UK as part of a $150m cost-saving and restructuring programme.
  • Poland's Zaklady Azoty Tarnow calls for voluntary redundancies as it looked to cut 250 jobs to counter falling demand.

February 2009

  • Celanese shuts its vinyl acetate monomer plant in Cangrejera, Mexico. The US-based company said that closure was necessitated by the significant change in the global economic environment.
  • Huntsman calls a halt to work on the design and feasibility studies for a planned 400 000tpa methylene diphenyl diisocyanate (MDI) plant to be built on the Netherlands. The company said the project would resume when global demand improved.

Events source: ICIS News