Saturday, September 24, 2005

All industries suffer from memories of recent failures.

How much is by choice, and how much is out of one's control?

---

Hard lessons mean that heavy bingeing is unlikely - US OVERVIEW: Parallels with previous points in the industry's history are inevitable, says Dan Roberts. But executives have learnt the hard way.

By DAN ROBERTS
697 words
21 September 2005
Financial Times
Surveys CHE1
Page 3
English
(c) 2005 The Financial Times Limited. All rights reserved

The headquarters of Dow Chemical does not look much like a home for recovering alcoholics. Its rural campus outside Midland, Michigan, is more likely to be frequented by turkeys and deer that roam wild than any wandering inebriates - especially now that a new perimeter fence is going up as part of security.

But drunkenness is the metaphor chosen by Andrew Liveris, Dow's Australian-born chief executive, to describe an unpleasant period in the industry's past which most of its participants hope to forget.

Conditions were not dissimilar to today's. Healthy economic growth, driven by Asia and the US, brought high prices and strong demand to a global chemical industry desperately looking to show sustainable returns to investors. Only this was during the last economic upswing of the late 1990s when optimism and high profits encouraged unsustainable investment in new capacity.

Dow - the largest US chemical producer and global number two - joined most of its peers by investing heavily in new cracker facilities, but demand slipped behind supply and prices suffered a painful correction.

Mr Liveris is among many who believe that the generation of managers scarred by this particularly tough contraction after 2001 are unlikely to repeat their mistakes. This time around there has been little new capacity planned by US, European or Japanese chemical groups. Growth expected to come from elsewhere in Asia will be slower off the mark because operators there lack the experience in building new plants.

"I think there will be less bingeing this time simply because there are fewer alcoholics than before," he says.

Dow is also increasingly optimistic about another problem that has dogged the US chemical industry for several years: high natural gas prices.

In contrast to the European industry, many US crackers rely on natural gas-based feedstocks rather than oil because historically it was North America's cheapest and most abundant energy source. But the so-called dash for gas by power station operators in the late 1990s has reversed this feature of the market, and soaring natural gas prices have increasingly made US chemical plants uncompetitive by world standards.

Dow has been at the forefront of a trend among global chemical producers to invest instead in the Middle East, where proximity to cheap energy sources provides a natural competitive advantage.

But heavy lobbying by the American Chemistry Council and other pressure groups in Washington does seem to have brought some longer term relief to the US industry in the shape of the recently passed Energy Bill.

It allows for greater use of existing offshore oil and gas platforms in the US. Republican politicians are increasingly confident they will also be able to open up new gas fields for exploration and development. This is particularly so given the impact of the energy supply shock following Hurricane Katrina. It is thought this will help overcome some of the remaining environmental obstacles to offshore drilling.

"I think it is unlikely that we will regain our position as a major exporter in the US, but I am confident that energy prices here will return to a more neutral position in the medium term," says Mr Liveris.

Whether energy prices become more favourable soon, the industry has arguably earned the right to greater optimism because of its success in passing on costs to its customers.

DuPont, the number two US producer, announced the latest prices earlier this month as the spike in energy costs following Katrina prompted it to raise prices on 35,000 products, including chemicals, seeds and specialty plastics.

Robert Shrouds, DuPont's corporate economist, also predicted prices for crude oil, natural gas and refined petroleum were likely to remain close to record highs in the foreseeable future.

But so long as the growing cost of energy does not trigger a wider economic slowdown, the newfound investment discipline among major chemical producers suggests supply will remain tight enough for them to pass on their rising costs to customers.

0 Comments:

Post a Comment

<< Home