Ineos tightens belt and rejigs loans

As recession bites the petrochemicals sector, worrying signals emerged from Ineos, the world’s third-largest chemicals company behind Dow and BASF. Sharp drops in the prices of oil and petrochemicals saw it negotiating to waive covenants on its bank loans in December, and shelving plans to build four biodiesel plants across Europe. 

Ineos’ difficulties reflect the severe impact of a recession which analysts say may force radical restructuring, takeovers, or breakups in some bulk chemical companies in North America, Europe and parts of Asia. 

But as a private company - the UK’s largest - with debts of 

7.29 billion (?6.3 billion) amassed after a decade of business acquisitions, Ineos’s problems have attracted particular attention.

By late 2008 the company employed 16,000 staff at 70 manufacturing sites in 14 countries, and had annual revenues of 

30 billion. Yet as 2008 earnings plummeted (dropping 20 per cent in the third quarter compared to 2007) Ineos was in danger of infringing covenants on bank loans that stipulated debts should not be too high a multiple of profit. 

The company successfully agreed a temporary waiver of the covenant with banks, in return offering to pay higher interest rates on its loans and draw up a revised business plan by April 2009.

And in order to avoid spending any more of its capital than necessary, Ineos scrapped plans to build biodiesel plants in Belgium, France, Germany and Scotland. 

’It should not have any difficulty paying its interest payments [

500 million annually],’ says Paul Hodges, chairman of International eChem (IeC), a chemical industry consultancy. ’The challenge will be the repayment of the loans which are due later [around 6.5 billion is due to be returned or refinanced from 2012]. With one or two other petrochemical companies, Ineos will be testing during this recession a new business model for running a commodity chemicals operation with relatively high levels of debt.’

Bulk impact 

According to a report published by management consultancy firm KPMG, European petrochemical companies are not only facing problems caused by the recession. Theyare also expecting increased competition from Middle Eastern rivals that have access to an abundant supply of cheap oil and gas. 

’More than 53 new plants could come on stream by 2012 [in the Middle East] which, if taken together with investment in Asia, could lead to European players being marginalised on the global market,’ says Chris Stirling, European Head of Chemicals at KPMG. 

The report suggests that European companies need to team up with those in the Middle East to access their feedstock resources - something Dow has done with the formation of K-Dow, a joint venture with the Kuwait Petroleum Company.  

’The petrochemical companies most affected by this downturn will be those in northeast and southeast Asia which are mainly exporters,’ Hodges reckons. ’Ineos and other European petrochemical companies are in a stronger position because Europe’s market is mainly regional but its margins will be threatened by low-priced Asian imports.’ 

’There is a real danger that some petrochemical companies - at least in their present form - will not survive this recession,’ summarises Philip Leighton, a petrochemicals consultant at Jacobs Consultancy, London. ’There will be a much bigger shakeout in the petrochemicals industry than we have seen in previous recessions.’  

Sean Milmo 
Additional reporting by Matt Wilkinson