Force majeures hit new record high as safety loses out to profits


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.

IEA Feb17This 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.

 

Force majeures at all-time highs even before downturn begins

FMs Jul16There 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

The realisation that all accidents are preventable occurred in the 1980s, with the introduction of Total Quality Management in major companies such as DuPont and ICI.  Safety was put at the top of management agendas, ahead of profit, and companies adopted international standards which became the basis for Responsible Care programmes.

“Quality management principles are a set of fundamental beliefs, norms, rules and values that are accepted as true and can be used as a basis for quality management.”

As the Chartered Quality Institute notes:

Total quality management is a management approach centred on quality, based on the participation of an organisation’s people and aiming at long term success (ISO 8402:1994)”

The key phrase is “long term success”.  Companies commit to training programmes that enable employees to understand the cultural and practical steps necessary to ensure that the company operates on the principle of “right first time”.  If an accident occurs, a team is established to understand what went wrong, and what needs to be done to ensure it is not repeated.  And management commits to paying the cost – because they know that they will save money over the longer term.

Of course, there is always a temptation to “cut corners” and save this cost by “taking a chance”.  And as I noted in my last 6-monthly review of the data, it seems that the short-termism of financial markets is causing more and more managers to adopt this “cross my fingers and hope” policy:

Many managers feel pushed to cut back on maintenance and training, and take the risk of using equipment beyond its scheduled working life – thereby saving money and boosting the share price in the short-term.”

The fact that this policy has been followed in the good times, when profits were high, is not a good sign as we now enter the downturn.  Essential training has already been reduced, and equipment is already running beyond its scheduled life.  So many companies will be very exposed as their profits begin to stall.

There is nothing more important than safety.