Chemical industry stands firm in the storm
The insolvency index amongst companies in the chemical sector showed a 10% increase in the first half of 2012 over the same period last year. Even if the crisis has already taken its toll, harsh and challenging conditions will last at least throughout this year.
The insolvency index in the chemical industry grew by 10% in the first half of 2012 year-on-year, which indicates that the chemical sector’s position is much more favorable than the national average, standing 30 percentage points higher, according to the latest figures of international credit insurer Coface.
The chemical industry is still one of the least risky sectors in Hungary, due to its relatively low insolvency ratio. Yet the chemical industry struggles with the same problems every area of the Hungarian economy experiences: shrinking domestic market, declining profitability, the crisis tax and new levies, pressure on cost reduction, deteriorating R&D and investment expenditures, as well as an uncertain management, business, and regulatory environment. “And the new fiscal austerity measures now taking shape will further increase uncertainty in the sector,” Coface executive director Gábor Kárpáti said.
The surprisingly low insolvency index amongst companies in the chemical sector is very promising. Taking into account that the chemical industry is closely linked with almost all sectors of the economy, the result is even more heartwarming. Insolvency procedures in the sector remained relatively low, affecting only 0.5% of all registered businesses, according to Coface. The most common procedure was forced liquidation (52%), but no company filed for bankruptcy throughout this period. Procedures mostly involved plastic, ceramic, and glass manufacturing companies. Enterprises subject to procedures have been smaller, with a turnover of less then HUF 300 million, as these companies could not cope with elevated burdens on businesses and were thus forced to abandon operations. The indicator proves that the resilience of the chemical industry in the crisis is still relatively high, and this performance is particularly highly rated as it has faced a very difficult period recently. Almost all of its partner sectors were hit hard by the recession, which is clearly reflected in the sector’s orders. As the majority of chemical companies imports raw materials, exchange rate exposure is significant. But the chemical industry has a “secret weapon” to lower increasing risks on a deteriorating market. As multinational ownership is overrepresented in the sector, most of them are insured and are willing and able to use risk management tools to dodge losses from non-paying partners. Through continuous monitoring, credit rating services, and accounts receivable insurances, they have built up a reliable customer base, minimizing the possibility of losses, Kárpáti said.
Innovative new ways
Hungary’s MOL Group, one of Central Europe’s leading international oil and gas companies, had tough experiences last year due to the depressed environment for the refining and petrochemicals industry. Crude prices increased and thus energy prices rose by more than 25% compared to 2010 levels, compounded by unstable product crack spreads (the difference between the price of crude oil and petroleum products). Amidst the economic crisis, fuel demand declined and markets shrank. The annual average integrated petrochemicals margin hit its lowest level ever and shrank by 14% compared to 2010, thereby blighting European petrochemicals markets. However, MOL was able to not just manage the crisis but to grow in this period. As the group reacted quickly upon the first signs of trouble, it was much better prepared than many of its competitors. Maintaining a very strong financial background, the company believes that it will be stronger after the crisis than before. “We focused on optimizing our operations through the entire value chain. With the new structure in place, our aim is to increase profitability and reduce risk at group level through improved cost efficiency and more flexible operations and by finding global optimums rather than local ones,” MOL says.
On a completely different playground, the crisis swept across the real estate market and through closely linked chemical businesses (like the coatings market) as well. The termination of residential building grants further complicated the position of the sector, which was already hit hard by the credit market collapse. The decorative coatings market has shrunk by almost 40% in the five years from 2007, according to Hungary’s leading manufacturer Trilak. The huge fall in new homes sales (65% less homes were handed over last year than in 2007), the drop in sales of used flats (a 60% fall compared to 2007, according to real estate agency Dunahouse), and the downturn in general purchasing power are to blame for the market decline.
In addition, businesses had to struggle with increasing raw material prices and the negative side effects of the Hungarian forint’s depreciation as market players purchase 80% of raw materials from abroad. The deterioration of the market has continued in 2012: Trilak predicts a further 4% fall this year, marketing director Attila Raskó said. The only encouraging economic indicator right now is this year’s increase in real estate purchases due to the early repayment scheme of foreign currency loans; however, its beneficial effects could not yet be seen in the paint market. However, the company is trying not just to survive but also to increase its market share and profitability through new solutions. New products have been launched over the past four years in response to the ever-changing demands of customers, it has invested HUF 400 million a year in manufacturing and trade, and introduced a whole new scheme for trade policies that helps Hungarian paint shops get through the recession more easily.
As if just to increase the challenges the sector has to face, several industries were hit by extra charges. Petrochemical companies were slapped with extra levies, while formerly existing burdens on the pharmaceutical industry, introduced in 2007, were kept in place citing the crisis. “As a multinational company, we are in cooperation with the governments in every country within the MOL group, and we encourage them to do everything to have a more stable legal environment, as it is beneficial for investors and can contribute to economic growth. We understand and support the Hungarian government as it tries to manage the tension in the public budget. But we believe that these extra crisis taxes can not be used as a tool for the long-term,” the company said.
The changing trends in the chemical industry would be helped if commodity prices were consolidating, as it would allow companies to reduce their prices to generate demand. In a recessive economic environment, when demand falls, it is very difficult to cope with continuous price increases as well. The players can compensate for the negative trend only by finding market segments not yet serviced, renewing their distribution strategies, or improving operational excellence. “Of course, it is essential for the industry to grow, and for the whole macro economy to recover, but I believe the seven lean years are coming to an end soon,” Raskó said.
But the future still does not look bright. Even the pharmaceutical and the over-performing chemical industry’s situation could be made more insecure by the new austerity measures penciled into the second Széll Kálmán Plan, an updated structural reform plan. While the plans actually serve the purposes of regaining the trust and confidence of investors in Hungary at the macroeconomic level, they could further escalate an already difficult situation, Kárpáti said. For example, further tightening of the drug support system could result in negative side effects spilling over into the whole industry, affecting small drugstores, wholesalers, and manufacturers alike.
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