Companies have clearly been cutting capital budgets, in response to the slowing global economy. That’s the only conclusion to be drawn from the blog’s 6-monthly review of force majeures, as reported by ICIS news. They have been climbing steadily for months, and June saw them at twice the June 2012 level, as the chart shows.
This confirms the blog’s worries in Q1, when it seemed that maintenance spend had begun to be cut. This is always one of the easiest targets for a cost reduction programme, as it usually takes time for the results in terms of reduced availability to become clear. Equally, with demand slow, the loss of production doesn’t seem to matter as much as when plants are trying to produce maximum volumes.
The negative side of a slowdown in maintenance takes longer to appear. But in the blog’s personal experience, it can be very damaging indeed:
- Customers lose confidence in the supplier’s reliability
- They may well cancel contracts, or demand bigger discounts to continue them
- This leads to a vicious circle, where less cash is available for future maintenance
In addition, of course, there is the even more important issue of safety. Lack of maintenance increases the risk of injury on plants – many of which are major hazard operations. In turn, this can jeopardise a plant’s licence to operate.
Sadly, however, too many senior managements are currently ruled by the short-term outlook of the financial markets. But they should look at top-performing companies such as ExxonMobil and DuPont. These do not cut maintenance at the first sign of trouble. And their long-term record highlights the benefit of focusing on the future, rather than short-term gain.
As the major regional economies continue to slow, more companies are starting to reduce capital budgets. Maintenance spending is always an easy target for a cutback. The cost of poor performance may not be seen for some time, whilst the bottom line sees an immediate benefit. Thus it is worth keeping a careful eye on force majeures, as they provide early indication of problems ahead.
Q4 saw relatively low operating rates, so the blog deferred its usual 6-monthly review until now, to enable January performance to be analysed as well. When there is little demand, as in Q4, there is little need for companies to declare force majeure. They can instead carry out repairs without disrupting deliveries.
The chart suggests some concern is necessary, with 27 force majeures reported in January versus only 18 in 2012. This was a different picture to H2 2012, when there were just 117 reports versus 179 in 2011.
The question today is whether it is January’s trend, or that of H2, that continues. If companies have been sensible, and kept up on maintenance, then they should now demonstrate a steady operating performance. If not, then customers and investors will no doubt start asking awkward questions about whether short-term profit improvement has jeopardised long-term survival.
The good news is that the blog’s 6 monthly review of force majeures shows considerable improvement from H1 2011’s performance. As the chart indicates, the number of ICIS news reports of force majeures halved from 375 in 2011 to 179.
Some of the decline was, of course, expected as there has thankfully been no repeat of Japan’s disaster in March last year. Equally, output has been reduced in recent months, and so any outages have not necessarily led to the need to declare force majeure.
But good news is good news. It is also sound business sense for companies to maintain their plants properly, and train staff to high standards. Investors greater awareness of safety issues post Deepwater Horizon has probably also been helpful.
Of course, during tight markets, unplanned plant outages only serve to push prices higher, so the penalty for poor performance is minimised. But when markets weaken, customers have more choices.
They tend to remember those who were reliable suppliers. And they often penalise those who weren’t. As a result, the weaker performers find contract sales harder to achieve. And very often, their selling prices also suffer – just at the moment when they can least afford this.
The blog’s 6 monthly review of force majeures (FM) reveals worryingly little improvement in performance. As the chart shows, H2 was slightly better than H2 2010. But realism suggests it was flattered by Q4’s low operating rates, which probably reduced the actual need for FMs.
The chart is based on the number of FM mentions in ICIS news. It shows FM reports in H2 by year since 2005. Clearly there was a great improvement between 2005-7. But since then, the momentum for change seems to have disappeared.
The industry’s near-record profitability over the past 18 months should really have led to a much greater reduction in outages.
This is very disappointing for anyone who remembers the pioneering work on this issue by the then giants of the industry, DuPont and ICI. They taught us that ‘all accidents are preventable’, and instilled a culture which led to safety reporting being the first item at Board meetings.
Many companies, of course, still follow these rules, and focus on continuous improvement. They benefit not only from ‘doing the right thing’, but also from better profitability and customer relationships.
But procurement professionals around the world line up to tell the blog about their frustration at the problems they encounter on a day-to-day basis. The blog only hopes their continued pressure will lead to it being able to show a better performance in July.