APPE/PlasticsEurope
General Assembly 28 May 2009
Impact of the crisis on
petrochemicals and derivatives
John Baker
Global editor
ICIS
APPE/PlasticsEurope
General Assembly 28 May 2009
Topics today
 Economic and market conditions
 Industry reaction
 Slight recovery?
 Restructuring/M&A
 Capacity developments
 European strategies
APPE/PlasticsEurope
General Assembly 28 May 2009
Economic and market conditions
 Petrochemicals sector had enjoyed extended peak of cycle
performance for several years – high oil prices/tight supply
 Was expecting supply-led downturn into 2009-10 – added Middle
East capacity
 BUT – severe demand-led slump in December 2008 and Q1 2009
 The result of financial crisis and ensuing economic slowdown
 Driven by automotive, construction and electronic goods sectors…
 Food, agchems, personal care, etc… much less impacted
APPE/PlasticsEurope
General Assembly 28 May 2009
Global demand declines
 European car production expected to fall 25% in 2009 – EU
projection
 German construction output down 26% in January 2009, y-on-y;
euro zone activity down by 9.1% - Eurostat
 Japan’s export value shrinks by 50% in February 2009
 Global trade to fall by 9% in 2009 – WTO forecast
 Global GDP to contract by up to 1.0% in 2009 - IMF
 European petrochemicals output drops 40% in December 2008,
polymers by 33% - Cefic/Eurostat
APPE/PlasticsEurope
General Assembly 28 May 2009
APPE/PlasticsEurope
General Assembly 28 May 2009
APPE/PlasticsEurope
General Assembly 28 May 2009
APPE/PlasticsEurope
General Assembly 28 May 2009
The current recession has hit the chemicals sector hard and driven
down valuations
$MM USD
Quarterly Operating Income
Enterprise Value — 2000-2009
(Average of selected companies: BASF, Dow
DuPont, Akzo Nobel, PPG and Sabic)
(Inflation-adjusted -- $B08 -- 35 Chemical Companies)
350
325
300
275
250
225
200
175
150
125
100
75
50
25
0
2000
2,500
2,000
1,500
1,000
500
0
-500
2003Q4
Source:
2004Q4
2005Q4
2006Q4
2007Q4
2001
2002
2003
2004
2005
2006
2007
2008
2009
2008Q4
Chemsystems, Bloomberg
1
APPE/PlasticsEurope
General Assembly 28 May 2009
Industry reaction
 Reaction was rapid and largely effective
 Plant idling and closures; reduced working, job cuts…
“flexibilisation” of the workforce
 Intense focus on cash flow and reducing working capital
 Reduction of inventory at the producer
 Reductions in capital expenditure – project delays… Repsol YPF at
Sines, for example
 Cut backs in discretionary spend – travel, etc…
APPE/PlasticsEurope
General Assembly 28 May 2009
Main metrics being used at present
APPE/PlasticsEurope
General Assembly 28 May 2009
Most common actions in the crisis - production
APPE/PlasticsEurope
General Assembly 28 May 2009
Most common actions in the crisis – workforce
APPE/PlasticsEurope
General Assembly 28 May 2009
Slight recovery – or just stabilisation?
 Volumes and prices recovering a little in Europe
 Excess inventory in supply chain being worked off
 Signs of slight pick up in Latin America and Asia - but Japan
suffering badly – trade down 25%, GDP down 4% in Q1
 Europe expected to recover more slowly
 Most producers expecting rest of 2009 to be flat and 2010 difficult
 Even with demand recovery, 2011-12 will be difficult as supply-side
effects finally kick in – new Middle East capacity comes onstream
after delays
 2013-14 could be good times – for those that pull through
350.00
01/01/93
01/07/93
01/01/94
01/07/94
01/01/95
01/07/95
01/01/96
01/07/96
01/01/97
01/07/97
01/01/98
01/07/98
01/01/99
01/07/99
01/01/00
01/07/00
01/01/01
01/07/01
01/01/02
01/07/02
01/01/03
01/07/03
01/01/04
01/07/04
01/01/05
01/07/05
01/01/06
01/07/06
01/01/07
01/07/07
01/01/08
01/07/08
01/01/09
APPE/PlasticsEurope
General Assembly 28 May 2009
IPEX May 2009
400.00
190
300.00
250.00
200.00
150.00
100.00
50.00
0.00
APPE/PlasticsEurope
General Assembly 28 May 2009
APPE/PlasticsEurope
General Assembly 28 May 2009
Restructuring/M&A
 Most agree downturn will prompt restructuring in European
petrochemical base
 Already Total, LyondellBasell and SABIC have said they will close
units in Europe (LDPE); Rhodia (nylon), Total (PS)… PVC in Italy,
Ineos (chlorinated solvents…)
 More plant closures to come – old and underperforming units
 Difficult decisions due to integrated nature of the sector
 Only two ethylene units closed since Baglan Bay in 1994 – Gela
(2007) and Carling (2009)
 Now is an ideal time to act
APPE/PlasticsEurope
General Assembly 28 May 2009
Restructuring/M&A
 M&A activity depressed - but companies will be looking to sell noncore assets – to focus on core activities and raise cash
 Producers focusing on cash conservation
 Private equity out of the market as debt financing has disappeared
 Sovereign wealth funds one possible source of funds – IPIC and
Nova Chemicals
 But some deals possible – Dow Chemical/Rohm and Haas – leading
petchem asset divestments; Mitsubishi Rayon/Lucite;
Rhodia/McIntyre
 Debt-laden companies suffering – LyondellBasell in Chapter 11,
Ineos renegotiating covenants….
 Cash-rich and oil-backed may emerge as stronger players
APPE/PlasticsEurope
General Assembly 28 May 2009
Capacity developments
This year and next sees large amounts of petrochemicals capacity
coming onstream in China and the Middle East
APPE/PlasticsEurope
General Assembly 28 May 2009
Capacity developments
More capacity due 2010-12 – but timing of many projects is uncertain
New crackers and major expansions in planning 2010-2015:
China (20)
India (8 )
Saudi Arabia (9)
Oman, Qatar and Abu Dhabi (7)
Iran (5)
Singapore (2)
Taiwan (2)
Thailand (2)
APPE/PlasticsEurope
General Assembly 28 May 2009
European strategy
 Closure of laggard plants and restructuring of asset base
 Focus on R&D and innovation for lower-volume, higher added-value
products
 Optimise supply chain operations and customer closeness
 Establish or maintain production base in Middle East – for standard
and high volume grades
APPE/PlasticsEurope
General Assembly 28 May 2009
Impact of the crisis on
petrochemicals and derivatives
John Baker
Global editor
ICIS