Turbulent Times Continue for Chemicals Manufacturers

Having already withstood one of the worst recessions in living memory, chemicals manufacturers were very much hoping for some respite, as the world economies appeared to be pulling out of recession.

The summer break, however, has brought more suggestions of double-dip recession and with car sales and construction starts down, together with a likely slowdown in economic activity in China, we can foresee a difficult few months for the chemical industry. The 'new normal' as predicted by my colleague Paul Hodges, is very much with us.

So how do we cope with this 'new normal'. We've already had job cuts and, in many instances, significantly reduced levels of discretionary expenditure. So where next? It certainly isn't an easy question to answer and there isn't a one size-fits-all solution but I think that a very high level of challenge and focus is most important, in order to ensure that we are fully focussed on doing the right things

Here's a list of questions to challenge the management team of any chemicals manufacturer...

• Do you have a highly capable manufacturing management team?
• Does your team understand the challenges of the new normal?
• Does the team understand the need for adaptability and flexibility?
• Does the team know how to achieve this adaptability and flexibility?
• Are management objectives aligned with these needs?
• Have strategies been prepared for the challenges which may occur?
• Are all of the operating and capital cost requirements fully understood?
• Is there a relentless drive to improve cost effectiveness?
• Does the management team understand fully the consequences of any decisions they make?
• Do you know what your competition is doing to achieve success in the new ‘normal’?
• Does your workforce have the right skill levels for the high level performance required under varying conditions?
• Does your workforce understand the need for change?
• Do you have appropriate agreements in place to give you the required levels of flexibility?
• Are your workforce objectives and targets aligned with those of management and the organisation?

Better News For Manufacturing Sector

Back in November, I reported on the optimism expressed by purchasing managers in the Institute of Supply Management (ISM) October report.

The latest report, for March 2010, shows that the US manufacturing sector expanded for an 8th consecutive month, showing that the optimism was justified.

As noted previously, The Institute uses its Purchasing Managers' Index (PMI) as an indicator of performance. A PMI score of below 50 indicates that the sector is contracting, whilst a score above 50 indicates that the sector is expanding. The data for the index is collected using a survey of 400 purchasing managers in the manufacturing sector on five elements; production level, new orders from customers, speed of supplier deliveries, inventories and employment level. Studies have shown that the PMI gives reasonably good correlation with the state of the economy and GDP growth.

The index has rebounded from a low point of 32.9% in December 2008 and now stands at a figure of 59.6%, a very positive score, reflecting the growing optimism throughout US manufacturing.

For chemicals, the news is mixed. Automobile sales have improved significantly and with each new car containing almost $3000 worth of chemicals, this is very welcome news. Meanwhile, another major consumer of chemicals, the construction sector, remains relatively flat.

More positive signs. Still a long way to go to reach 2008 levels but a major improvement on 2009.

Chemical Manufacturers Look to the Future

Chemical Manufacturers are taking decisive actions to position themselves for the future. According to Price Waterhouse Cooper's 13th Annual Global CEO Survey, chemical companies are responding to the current challenges in a number of ways:

• Companies are increasingly looking to Asia and expect operations to grow in this area
• The level of M&A activity is expected to increase
• Companies see innovation as being essential to future growth
• Comapnies are spending more to develop leaders and in-house talent
• Cost cutting and infrastructure improvements are essential

The comments absolutely reflect the need for a coherent and strategic approach to survive and thrive in these turbulent times. As noted previously, excellent strategic planning, in-built flexibility and the ability and desire to innovate will be the key attributes of successful companies.

Latest ISM Report Suggests Recovery in Manufacturing Sector

The October report from the Institute for Supply Management (ISM) has shown that economic activity in the US manufacturing sector expanded in October for the third consecutive month. Conventional wisdon suggests that such a sequence is confirmation of a well established recovery.


The Institute uses its Purchasing Managers' Index (PMI) as an indicator of performance. A PMI score of below 50 indicates that the sector is contracting, whilst a score above 50 indicates that the sector is expanding. The data for the index is collected using a survey of 400 purchasing managers in the manufacturing sector on five elements; production level, new orders from customers, speed of supplier deliveries, inventories and employment level. Previous studies have shown that the PMI gives reasonably good correlation with the state of the economy and GDP growth.

The index has rebounded from a low point of 32.9% in December 2008 and the chart shows that the growth has been steady over the last year.

Chemicals and plastics reported growth as did petroleum and coal products. Respondents were also positive about the employment outlook in manufacturing.

Although these figures are good news there are still concerns about the 'China Effect' in the chemical industry, with much of the extra demand coming from the Chinese government stimulus packages and the easy availability of finance in China. We also still have the effects of US and European local stimulus packages such as 'cash for clunkers'. On the other side of the equation, housing starts remain low, meaning less chemical consumption and unemployment is still rising, which will have an impact on consumer spending.

Mixed news is better than bad news but it is difficult to be certain about whether or not this really is sustained recovery until a clearer picture emerges.

Mixed News as Companies Report on Q3

Mixed news for the chemical and process industries as companies reported Q3 results

• BASF reported third quarter profits down 69% year on year to €237M. BASF expects a long slow climb out of recession. BASF expects some employees will remain on short-time working into 2010. Whilst business has stabilised the climb out from the trough will be slow.
• Shell reported a collapse in Q3 profits from $10.9 billion in 2008 last year down to $3 billion. As a result of this poor performance, Shell will axe some 5000 jobs worldwide in its 'Transition 2009' programme
• BP's results were some 50% better than city analyst's expectations, with replacement cost profit of $4.98 billion. BP has already cut costs following reorganisation and efficiency improvements and aims to do even more this year. BP noted that they had achieved a 7% increase in production as well as a number of new developments in the Gulf of Mexico, Iraq and China, amongst others.
• GSK showed that the pharma sector is still reasonably strong. Profits were up 12% at $2.4 billion. Demand for the H1N1 vaccine has help bolster GSK

Overall, things remain tough for commodity sector, and particularly for those who rely on housing starts and the automotive sector for a major proportion of their demand. The end to the various stimulus packages will also create issues as volumes drop back to the 'new normal'.

Some sectors are clearly much less affected, such as pharma, although cost cutting and a move to generics will make things tougher.

For manufacturers, we can anticipate another tough year, chartacterised by reorganisations, reduced capital expenditure and some site closures as we slowly start to pull out of recession.

Avoiding a Recessionary Mindset

I've been talking a lot about impacts of recession in this blog and the need for effective management of change to manage risk and avoid creating long term issues. The same level of focus applies to the situation we will encounter post recession, when we need to drive the performance of our assets.

The London Business School provides an excellent YouTube channel called 'Survival of the Fastest'. The site has a large number of 'bite sized' video clips for managers, focusing on a wide range of topics.

There is a wealth of information that is relevant to managers involved in Chemicals Manufacturing, with topics covering a range of subjects such as innovation, people management andcost control, to mention but a few.

I've extracted just one example 'Avoiding a Recessionary Mindset'. As managers in the Chemical Industry, we have been dealing with the effects of recession for some time now, with reduced output, reductions in expenditure, job cuts and site closures very high on our priority lists. This can create a 'recessionary mindset', where our focus is on problem solving and survival.

At some time in the not too distant future, however, we will need to increase output, review our organisational requirements and adapt ourselves to the post recessionary situation. If we are stuck in crisis mode, this can be a difficult shift to make.

Recession Hits Jobs in US Chemical Industry

New figures from the US Department of Labor show that the number of job losses in the chemical industry has increased steadily in 2009. The figures show that the industry now employs 41,000 fewer workers than at the same time last year, a decrease of 5% Whilst employment numbers in the chemical industry have been falling for several years, this is believed to be due to productivity improvements. The latest falls are very much thought to be recession related, with most of the cutbacks in production positions. I don't consider these figures to be a surprise. Almost all organisations are having to deal with the effects of recession and cost savings are essential to survival. What is vital, however, is to use a robust management of change process when deciding where to make cuts - otherwise safety, productivity and your reputation could suffer as a result of poor decisions