Petrochemical companies face major test

THE CHEMICALS INDUSTRY faces a difficult period with the combined strain of plunging demand and frozen credit markets taking their toll as the global economy continues to struggle. The world's third-largest petrochemical company, LyondellBasell, recently filed for bankruptcy, while many other chemical companies have closed factories, reduced their workforces and withdrawn from deals so they can stay afloat.

Senior energy analyst for PNC Capital Advisors, Gene Pisasale, told Reuters, "Clearly, demand trends are decelerating and they are going to decelerate into the first half and possibly second half of this year."

The weakening economy has affected chemical companies drastically as demand from the industries they supply, such as the automobile, housing and electronics industries, dwindles. Emerging regions have also experienced a slowdown, having previously driven the growth of the chemicals industry in recent years. "We are setting up to repeat the cycle and dealing with some highly leveraged companies," said Kyle Loughlin, an analyst for Standard and Poor's, who explained defaults in the chemical industry rose in 2008 and would probably continue to rise. "I suspect the current quarter is going to be particularly ugly for a lot of companies."

Specialist chemical companies, such as Rohm & Haas and Albemarle will fare better during the downturn than commodity chemical companies like Dow Chemical Co, according to analysts. Dow recently announced the closure of 20 facilities and 5,000 redundancies as a measure to enable the company to cope with the global economic slump. DuPont has also cut jobs and delayed expansion plans in China while Eastman Chemical Co, Chemtura Corp and A Schulman are among chemical companies cutting payrolls.

Corporate deals have also been affected with Hexion withdrawing from a US$6.5 billion takeover deal of Hunstman Corp and Kuwait pulling out of a joint venture with Dow. The latter deal was set to enable Dow to purchase Rohm & Haas but that deal could now be under pressure. LyondellBasell was formed through a merger at the end of 2007, the current economic climate, where profits are scarce and refinancing is extremely difficult, could make this an exceptionally difficult time for the company due to its high level of debt.

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