Plants closed as global financial crisis begins to bite
The chemical sector across the world is bracing itself for the impact of sharp decreases in sales and profits in the wake of the global financial crisis.
Producers of chemicals are having to grapple with the double whammy of a slump in demand combined with a lack of access to credit. The major customers of the chemical industry, in particular the automobiles and construction industries, look likely to be particularly badly hit as many countries sink into recession.
Kevin Swift, chief economist and managing director at the American Chemistry Council (ACC), which represents US chemical companies, has warned about the threat of ’a broad-based slowdown in global economic and industrial activity’, aggravated by ’nagging uncertainty and utter lack of confidence’ in the financial system. ’We are truly witnessing history,’ he said in a briefing note on 10 October.
The European Chemical Industry Council (Cefic) declined to make any predictions of short-term future demand at its general assembly in Athens at the beginning of October. But speaking at the meeting, Francois Cornelis, outgoing president of Cefic and president of Total Chemicals, said the industry is ’extremely worried’ about the impact of the financial crisis. ’Chemical activity is very closely connected to trends in economic growth,’ Cornelis added.
Analysts believe that purchasing of petrochemicals and other commodity chemicals is already plummeting because of the dive in raw material prices. When prices go down chemical users rely on their own stocks for raw material supplies. This will result in poor sales and profits and even losses for chemical companies in the fourth quarter of this year, which will extend well into 2009.
’In these sort of conditions the general level of demand in the economy seems irrelevant,’ says David Thomas, chemicals analyst at Oxford Economics. ’There will continue to be heavy destocking until prices stop falling. We are not publishing any forecasts until late November when the outlook should be clearer.’
Similar views about the uncertainty facing the industry were echoed by executives at BASF, the world’s biggest chemicals producer, at a press conference in London in early October on the company’s oil and gas business. ’We’ll have to wait 30-60 days before can get a clearer view about the effects on the industry,’ said Hans-Ulrich Engel, a member of BASF’s management board. ’But there’s no question about the weakness of the automobile sector in the US and there’s now a slowdown in car sales in Europe.’
In its latest world economic forecasts issued on 8 October, the International Monetary Fund predicted that the economies of the advanced developed countries in Europe and North America would be static or even slip into recession next year. Global growth would only be 3 per cent in 2009 compared to 5 per cent in 2007 and 3.9 per cent in 2008. The strongest rises in economic output would be in China and India at 9.4 per cent and 6.9 per cent respectively.
’In emerging and developing economies, we predict that even they will grow at a substantially lower rate than they have in the recent past,’ says Olivier Blanchard, the IMF’s research director.
In Europe companies have started cutting back production of bulk polymer and other commodity chemicals (see Chemistry World, October 2008, p7).
Ineos and BASF have reduced output of polystyrene by 30 per cent and 25 per cent respectively, while Dow Chemical has temporarily shut down a plant making the plastic in the Netherlands because of low margins caused by poor demand.
Ineos has permanently shut down a 175,000 tonne-a-year polypropylene plant in Norway and is planning to close a 370,000 tonne-a-year ethylene cracker at Grangemouth, Scotland. The UK-based privately owned company, which is one of Europe’s largest petrochemicals producers, has been considered vulnerable to the credit crunch because of its dependence on debt financing. The outlook for Ineos was downgraded to negative in September by Moody’s, the credit rating agency.
However the company stresses that it is well prepared for the downturn in the petrochemicals cycle which became evident before the financial crisis. ’Our objective is to be cash positive at the bottom of the cycle,’ an Ineos official told Chemistry World. ’Our business is in good shape. We have no short-term debt. Most of it is long-term.’
Possibly the chemical companies most at risk from the credit squeeze are those heavily leveraged producers owned by private equity funds. Many SMEs could also have difficulties raising finance.
’Banks are charging SMEs more money for funds and are wanting more collateral for new customers,’ said Armodios Yannidis, president of the Hellenic Association of Chemical Industries, who was also speaking at the Cefic assembly. The vast majority of Greece’s 320 chemical companies are SMEs.