VINACHEM

A blog reader has kindly forwardedan interesting paper from AT Kearney, which looks at the amount of debt dueto be refinanced in the chemical industry over the next 5 years. As ATKnote:

“The restructuring and debtbuildup that occurred in the chemicals industry from 2006 - 2008 wasextraordinary—more than $330bn in deals over that period, with most dealsvalued at more than $5bn. The effect of that debt buildup is nearing: a wave ofrepayments that will come due between 2013 and 2016. In the next five years, 27companies will have to repay $110bn.”

The report is based on data from 200of the world’s major chemical companies, with combined debt of $380bn. Around half of this debt ($170bn) belongs to 27 companies, who each haveglobal turnover >$1bn. And it suggests that “Debt refinancing islikely to be a major driver for merger, acquisition, and divestment activity inall regions”.

One major complication in thisrefinancing process is the wave of new investment in the US, which could add40% or more to current capacity. There is, after all, only so muchfinance available, and ATK rightly point out that there have been some painfulwrite-downs in the sector since 2008.

It is thus extremely hard to see howall this financing and refinancing can take place. The blog keepscoming back to its basic question about the ethylene expansions planned for theUS, namely “Where will all this new capacity be sold?”

It is a simple question, but inthe 6 months since the blog first asked the question,it has become clear there are no simple answers:

• US ethylene production peaked in 2004 at 25.7MT (56.5bn lbs), and is still below this level today
• We could expect some improvement in domestic demand as reshoring takes place in the next few years
• But this will simply reduce volumes elsewhere, and not create new demand

It is also absolutely clear from thetrade statistics that US exports of derivatives such as polyethyleneand PVC cannot possibly increase sufficiently to utilise thenew capacity, as the blog discussed in December.

There is also very little discussionof the practical issues involved in supplying such large volumes half-wayaround the world. Storage and supply chain issues will addenormously to the costs, once they start to be added up.

The blog’s main concern that veryfew in the industry seem worried by the inherent contradictions exposed inthe ATK report. If all this new capacity goes ahead, there will bemassive over-capacity, particularly as China is also planning major expansionsbased on coal-to-chemicals. As ATK point out, there is thus a realrisk that we will see “a cyclical low in the commodity markets based onoverbuilding in the United States“.

It would be best if companies facereality on this issue sooner, rather than later. And here is, after all,a simple way for boards to check the robustness of the demand projections madein the expenditure proposal they receive. they should simply ask for themto be accompanied by signed offtake contracts from customers with strongbalance sheets.

If these cannot be obtained, whichthe blog fears, then they will have avoided an extremely costly mistake.