Just when you think something really can’t get any worse, it does. Sadly, that’s the story on chemical industry force majeures since my last half-year review. As I noted then:
“There is no such thing as an accident. The chemical industry, like others, has known this for over 30 years, since the adoption of Quality Management techniques. Yet it seems that over the past 18 months either this important fact has been forgotten or, more likely, I fear, has simply been ignored.
The evidence for this worrying statement is in the chart, which shows the number of monthly references to “force majeure” in ICIS News:
□ Until recently, this has shown 20 – 40 references a month, too high, but at least stable
□ Since 2015 there has been an alarming increase, with the range now 40 – 80 references
□ And there is no consistency on a month-by-month basis, suggesting that nothing is being done to improve the position”
As the chart shows, force majeures have since climbed to new all-time highs, with October showing a new monthly record of over 200 reports. The average for 2016 was 75/month, even higher than the 2015 average of 65/month.
What is to be done? Part of the problem is undoubtedly that plants are getting older, and so more likely to break down. Part of the problem is that preventive maintenance and training has been cut back to save money.
But the main problem in too many companies is more fundamental – too many senior managers now see profits as being more important than safety.
This is something quite new. In the past, force majeures would have led to lower profits – companies who were unable to supply would lose sales, and have to sell afterwards at a discount to compensate for their unreliability. But with today’s lower demand levels and growing capacity surplus, this discipline no longer applies. As the second chart shows from the International Energy Agency:
□ European and Asian refineries have been running well below pre-2009 levels due to lack of demand
□ They have therefore been producing less naphtha as a feedstock for petrochemical plants
□ Only N America has seen good refinery rates – and, of course, most of its olefin production is gas-based, so the higher rates do not translate directly into more product
The result is that companies have been under no pressure from their feedstock suppliers to sell more petchem products in order to use more naphtha. Instead, this slowdown in feedstock availability has balanced today’s weak levels of demand growth in major petchem markets and, counter-intuitively, led to relatively high levels of profitability.
The real question therefore is perhaps how long today’s abnormal market conditions will continue. When they end, and customers once more penalise unreliable suppliers, attitudes will change. One can only hope that today’s downgrading of safety consciousness doesn’t, in the meantime, lead to a major incident somewhere.
Looking down the table below of chemical company’s reports, its hard to be very optimistic about the outlook. The first half of the year disappointed, as I noted in August. Then Q3 saw major volatility as the hedge funds and high frequency traders played their games in the oil market – prices weakened as demand slowed, but then the story about another effort at an OPEC-Russia quota deal pushed oil prices back up again.
This meant that companies did a small amount of stock-building over the summer, when normally they would be using less due to the holiday period. But there was no major demand pull from the downstream end of the value chain. Of course, some companies still did relatively well – either because of luck, in being at the right place at the right time, or because they have a very robust strategy.
For most, however, the chart above from analysts Investec confirms the market weakness with which they have struggled in recent weeks, as Paul Satchell describes. His Volume Proxy indicator is showing a downturn in all 3 regions – most unusual for this time of year, when companies are normally operating at high rates to complete orders before the Christmas break. As Satchell comments:
“The index has proved to be good at indicating a turn in chemicals activity. It has shown surprising weakness in Europe over the past two weeks..and as Satchell adds
“The relatively benign operating environments enjoyed by many chemicals companies since late 1Q16 have led to a degree of complacency in the investment community. The paucity of negative surprises during that period has been implicitly taken as indicating demand robustness, a view with which we have never felt comfortable. If, as now looks possible, 4Q delivers a surprise negative end to 2016, the sector would be at risk of down-rating.”
His message parallels that being sent by the American Chemistry Council’s Capacity Utilisation data. Prudent companies and investors will already be preparing for a recession in 2017, as well as for major disruption as President-Elect Trump’s radical new policies get closer to being enacted.
Advanced. “Weighed down by declines in polypropylene prices”
Air Products. “Higher volumes driven by the Saudi joint venture were counterbalanced by lower energy pass-through and currency headwinds”
Akzo Nobel. “The market environment remains uncertain with challenging conditions in several countries and segments. Deflationary pressures and currency headwinds are expected to continue”
Alpek. “Subpar polyester segment results amid unfavourable oil and feedstock prices”
Arkema. “Improved margins at its high performance materials and coating solutions segments”
Asahi Kasei. “Lower styrene sales”
BASF. “Current volatile and challenging environment”
BP. “ Petrochemicals business, delivered resilient results”
Braskem. “Lower earnings across many of its divisions and headwinds from local currency appreciation”
Celanese. “Low acetyls chain utilisation rates in China and modest growth in North America and Europe”
Chemours. “Costs fell faster than sales”
Chemtura. “Cost of goods falling faster than sales”
Clariant. “Mid-term target of reaching a position in the top tier of the specialty chemicals industry”
Covestro. “Despite booming operating profits posted during the quarter – Covestro’s pricing power continued to fall”
Croda. “Demand remains subdued in a number of its end-markets”
DSM. “High margins at its materials division”
Dow. “Higher restructuring costs and lower divestiture gains”
DuPont. “Volumes rose 3% year on year, despite a tough macro-economic backdrop”
Eastman. “Continued competitive pressures due to lower oil prices and weak demand in Asia Pacific”
Evonik. “Lower raw material prices were passed on to customers”
ExxonMobil. “Tighter margins and higher maintenance expenses”
WR Grace. “Overall margin improvement and strong cash flow”
Hexion. “Slowdown in oilfield drilling”
Honeywell. “Higher sales volumes for catalysts and “productivity net of inflation”
Huntsman. “declines in earnings for polyurethances, performance products and advanced materials”
IRPC. “Increase in volumes failed to offset the decline in product prices.”
Idemitsu Kosan. “Narrowing of margins for styrene and other products”
Kemira. “Lower sales amid improved margins and lower fixed costs”
Kronos. “Rise in sales and the decline in cost”
LG Chem. “Weighed down partly by a stronger won”
Linde.” The group will be rolling out a new cost saving plan”
Methanex. “Average realised methanol price declined 27% year on year”
Mexichem. “Decline in costs was not large enough to offset the decline in sales
Mitsui. “Strong domestic demand”
Olin. “Higher costs for natural gas and purchased ethylene”
Oxychem. “lower sales volumes and higher costs”
PKN Orlen. “Lower petrochemical and refining product margins and sales”
PPG. “Broad deceleration of growth trends, where most of our coatings businesses experienced lower growth rates compared to the second quarter,”
PetroRabigh. “Weighed by lower petrochemical prices as well as plant turnarounds.”
PolyOne. “Higher restructuring and acquisition-related charges and a weaker performance for its specialties division”
Praxair. “Cost reduction actions in response to weaker underlying industrial activity in the Americas and Asia”
Reliance. “Higher sales volumes for catalysts and “productivity net of inflation”
Repsol. “Sales of petrochemical products rose”
SABIC. “Lower sales prices and lower sales volumes”
Sahara. “Sales declined while expenses increased”
Saudi Kayan. “Higher production and sales, as well as lower feedstock costs”
Siam Cement. “Strong performance in its core chemicals business”
Shell. “Stronger base chemicals industry conditions driven by tight supply in the Tosoh. “Improved trading conditions”
United States and Asia and improved operating performance in Europe”
Sherwin-Williams. “Revenue growth on a comparable basis slowed sequentially”
Sipchem. “Production cost increased due to higher gas feedstock, fuel and energy prices”
Solvay. “Softer demand in some our markets compared to last year”
Stepan. “Struggling surfactants sales in Europe and Latin America could not offset higher polymers sales”
Synthos. “Profitability of its styrenics businesses squeezed”
Teijin. “Concerns about further deceleration in economic growth cannot be dispelled, based on potential risks including protracted negotiations on the UK’s exit from the EU and economic corrections in response to the China’s excessive levels of investment,”
Trinseo. “Costs fell faster than sales”
Tronox. “Costs fell much faster than sales”
Unilever. “Economic fundamentals remain weak and volatile”
Unipetrol. “Full production are expected by the end of October”
Univar. “An overall sluggish economy”
Versalis. “Unfavourable trading environment with worsening margins of cracker, polyethylene and styrene”
Vopak. “Positive business developments”
Wacker. “Stronger demand for chemicals and semiconductor silicon wafers”
Westlake. “Transaction and integration costs from the purchase of rival Axiall”
Williams. “Higher olefins margins, lower operating and maintenance expenses”
Yansab. “Higher sales volumes and lower feedstock costs”
Companies are about to review their Q1 performance, and re-forecast profit and revenue for the rest of the year. Most will be disappointed with results so far, as the long-promised economic recovery has again failed to appear.
This will be no surprise to blog readers. But there is another and connected issue for Management Teams to worry about as we head into Q2. This is the unnatural calm that has settled over the oil markets in the past 6 months, as the blog discussed on Tuesday.
What would happen to their business if oil follows copper and other commodity markets and starts to tumble? Would it really stay within a narrow range, above $90/bbl? This seems highly unlikely, given the enormous amount of speculative money tied up in the market.
And if it does fall below $90/bbl, what would this mean for the prices of the major petrochemicals?
This question can at least be answered with more than 95% accuracy, as the above chart shows:
- It maps annual average European ethylene prices on the x-scale; annual average N Sea oil prices on the y-scale
- The data goes back to the first ethylene contract price in 1978 and is colour-coded by decade
- It shows there is over a 95% correlation between the two: if oil prices move, so does ethylene
The same rule applies to all the other major petrochemicals – propylene, butadiene, benzene and paraxylene. The propylene correlation is 97%, butadiene is 90%, benzene is 92% and even paraxylene is 87%.
Thus if oil prices do fall, we can be reasonably confident about what will happen to product prices. As the table shows on the chart, an oil price of $75/bbl would indicate an ethylene price of $1250/t; oil prices at $50/bbl would suggest ethylene prices of $900/t.
In the long-term of course, lower prices would be good for demand. Consumers would have more discretionary cash to spend. But oil producers have got used to today’s higher prices, and factored them into their budget calculations. Riots, or worse, might easily break out in some countries if these budgets came under pressure from lower prices.
Of course, managements might just decide to ignore the issue, and hope the consensus is right to assume oil prices will never again fall below $100/bbl. But history would suggest this is actually a very risky position to take. Anyone without a Plan B might look very exposed, given the weaknesses now being exposed in the global economy.
We all live in hope. That seems to be the underlying message from the blog’s quarterly survey of company results.
Nothing has changed since last quarter or indeed Q2, when BASF noted that “achieving our earnings target is significantly more challenging today than we had expected”.
Yet this latest quarter was, of course, supposed to be the one when everything would suddenly come right. But once again we are disappointed.
There were some bright spots, particularly amongst those US companies profiting from the shale gas feedstock cost advantage. And gas companies remain insulated from the wider economy by their long-term contracts.
But beyond these beacons of light, the mood has become quite cautious. Those close to the end-consumer, such as Akzo Nobel report that the environment remains fragile. In Japan, Asahi Kasei are remarkably downbeat about the outlook. Abenomics, which was supposed to reverse Japan’s demographic decline, is clearly not yet delivering on its promises. In China, Bayer report that the new government’s polices are already hitting earnings. And whilst BASF remain hopeful, expecting the world economy to improve slightly in 2014, even their optimism is tempered by concern over rising volatility.
The great author Charles Dickens was the first to describe this state of mind in his classic novel ‘David Copperfield’. It features Mr Micawber, modelled on Dickens’ own father, whose motto in life was that “something will turn up”.
However, nothing ever did turn up. Instead, Micawber finally recognised reality and decided to leave Victorian England for Australia, where he then successfully started a new life.
This is what we all have to learn to do. The global economy is not going to “turn up” and return to the SuperCycle. Demographics drive the economy, and today’s ageing populations are thus taking us in a new direction. This is the message of the latest episode of disappointment charted by Q4 results.
Air Products. “Continued to execute on our strong backlog, bringing on major new plants in China”
Air Liquide. “Positive trend observed since the beginning of the year, driven by our Healthcare activity”
Akzo Nobel. “The economic environment remains fragile and foreign currencies volatile”
Arkema. “Remains bullish on economic prospects for its key markets in North America and Asia”
Asahi Kasei. “Contracting demand in Japan and increasingly severe competition from low-priced imports”
Axiall. “Innovative new products and operated our plants at higher-than-industry rates”
BASF. “World economy is expected to grow slightly faster in 2014 than in 2013, despite continuing volatility”
BP. “Expects the fuel and petrochemical environments to remain challenging”
Bayer. “Reduced emphasis on economic expansion since the formation of China’s new government had led to a slowdown for chemicals earnings”
Borealis. “Continuing difficult market environment in Europe”
Celanese. “Earnings rise on lower expenses, asset disposition”
Chemtura. “Made significant progress in shaping our portfolio”
Chevron Phillips. “Focusing investments on higher growth and higher margin products”
Croda. “Global trends are unpredictable and our forward visibility remains limited”
Dow. “Global growth remains tentative, continuing to drive business uncertainty”
Dow Corning. “Year characterised by significant oversupply and pricing pressure in our industry”
DSM. “Focus will continue on the operational performance of our businesses”
DuPont. “Improvement was driven by higher volumes, new innovative products and productivity gains”
Eastman. “Challenges from increasing raw material and energy costs, particularly for propane, and continued economic uncertainty”
EQUATE. “Strong global demand for petrochemical products”
ExxonMobil. “The global chemical industry remains in a typical cyclical pattern, with the US at the top and Europe and Asia-Pacific at the bottom of the cycle”
Ferro. “Lower phthalate sales from its polymer additives segment”
Honeywell. “Unfavourable pricing in fluorine products and lower shipments in the aromatics”
Huntsman. “Aggressive self-help measures have re-focused our efforts on key markets and lowered our costs”
INEOS. “From 2010-2013, our profits in Europe have more than halved while profits in America have tripled”
Kemira. “Divestments, realignments and cost-reductions are focused on repositioning the company”
Kronos. “Lower titanium dioxide prices and the cost of settling a labour dispute”
LG Chem. “PVC margins were squeezed by the influx of offshore supplies and slow demand from emerging markets”
LyondellBasell. “We believe olefins in North America will continue to benefit from strong margins created by cost-advantaged NGLs”
Methanex. “Healthy methanol demand and stronger pricing”
MOL. “Integrated margin became weaker, driving results downwards”
Nova. “Profits primarily driven by higher polyethylene margins”
OMV. “Naphtha spreads increased somewhat”
Olin. “Chlor-alkali returns likely to be down from Q1 2014 due to lower ECU (electro-chemical unit) netbacks”
OxyChem. “New chlor-alkali capacity resulted in a significant increase in competitive activity in Q4 causing price pressure”
PKN Orlen. “Weighed down by unplanned plant shutdowns”
PPG. “Stabilising regional demand in Europe, where coatings volumes were flat in Q$ following 9 consecutive quarters of decline”
PetroLogistics. “Propylene prices may keep falling due to demand destruction”
Petro Rabigh. “Decreased petrochemical sales quantity due to utilities supplier blackout event in September had a negative impact”
Praxair. “Higher energy, metals, chemicals and manufacturing markets”
SABIC. “For 2013, net profit was up by 1.82% due to lower cost of sales and financial charges”
Shell. “Improved industry conditions in the US and Asia”
Sherwin-Williams. “Higher architectural paint sales volumes”
Sipchem. “Higher product prices, especially methanol”
Solvay. “Product prices fell in line with lower raw material costs”
Styrolution. “Good polystyrene margins and strong performance in the styrene monomer segment”
Unipetrol. “Profitability weakened due to a lower olefin margin”
Vopak. “For the first time in ten years, Vopak did not grow its earnings”
WR Grace. “Volatile moves in emerging nations’ currencies could have a major effect”
Westlake. “Higher PE and PVC resin sales prices as well as lower ethane costs”
Williams. “Continued decline in NGL margins and the significant and tragic Geismar inciden”
Yansab. “Forced shutdown of its production complex”