Yesterday, today, tomorrow — How the chemical industry can navigate crises

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Yesterday, today, tomorrow – How the chemical industry can cope in times of crisis -------------------------------------------------------------------------------- Publication date: 2009-2-13 13:05:00 Review: The impact of the Asian financial crisis in the 1990s Looking back at past experiences, the Asian financial crisis in 1999 had a significant impact on the development of China’s petrochemical industry; at that time, demand for petrochemical products was low, prices dropped, profits declined sharply, and the industry suffered widespread losses, with investment and innovation coming to a standstill. The entire industry, including those involved in fertilizers and pesticides, is operating at a loss, and most other industries are also struggling. After the financial crisis, the petrochemical industry gradually recovered, and it was not until 2003 that the sector emerged from its downturn and entered a period of growth. By 2008, the petrochemical industry had experienced five full years of prosperous development. Current situation: The crisis is affecting the chemical industry severely. The global economic landscape is unstable, and the impact of the financial crisis on the real economy is increasingly evident. With the world economy moving toward integration, it is difficult for the Chinese economy to stand out on its own amid the global recession. Meanwhile, the domestic industry still lacks sensitivity to the potential harms caused by financial crises. In our country, it takes about 1 month for economic effects to spread from coastal areas to the interior. For example, when methanol prices rise, this is first reflected in South China, and it takes about 1 month before the effect reaches East China. As early as September 2008, Guangdong-based enterprises faced a large number of closures due to the sharp decline in export markets caused by the U.S. financial crisis, and now this trend is gradually spreading to the northern regions, with a serious situation prevailing. Since the second half of 2008, prices of chemical products have dropped sharply; as construction activities in the real estate sector declined, demand for PVC and glass fell significantly, with the price of PVC dropping from 8,000 yuan per ton to 6,000 yuan per ton. The negative trends of weak market confidence, declining demand, and reduced production in the industry are continuing to worsen. Outlook: As the cold winter approaches, companies need to take proactive measures. Over the past 5 years, the petrochemical industry has experienced rapid growth, with annual sales revenue increasing by around 33%; the profits generated by this industry account for approximately 23% of China’s total industrial profits. This triggered a wave of investment in various industries within the petrochemical sector, with the scale continuing to expand and production capacity rising significantly. For example, amid high oil prices, the coal chemical industry has seen a surge in investment, with companies making substantial investments that have led to the emergence of coal chemical projects everywhere. In recent years, the capacity of newly launched methanol projects alone has reached 50 million tons per year, while the demand is only 12 million tons. In the current economic climate affected by the financial crisis, these rapidly growing companies will see a reshuffle, with smaller enterprises with weaker competitiveness being eliminated. Recently, international oil prices have fallen rapidly, dropping from $147.27 per barrel on July 11, 2008, to below $60 per barrel, showing a clear downward trend. For the chemical industry, when the prices of raw materials such as crude oil are high, although costs increase, product prices also rise accordingly; this \"high input, high output\" scenario results in larger profit margins for companies ； When raw material prices fall, demand from downstream markets decreases and product prices drop as well; thus, a strategy of buying at low prices and selling at lower prices ends up reducing the profit margins of enterprises. Therefore, it can be asserted that the coming period will be one of the toughest for businesses. The raw materials purchased at high prices earlier need to be sold off, yet current product prices have dropped significantly; this situation of buying at high prices and selling at low prices severely squeezes corporate profits. Response: Companies should be prepared to operate with tighter budgets. In terms of policies, it is recommended to **increase special loans and boost investment in major projects that are crucial for the country’s economy and people’s well-being** ； Encourage exports, adjust export tax policies, eliminate export tariffs as soon as possible, and increase export tax rebates. At present, the export tariffs on fertilizers in our country are as high as 135%–150%, making it difficult for fertilizer companies to export and putting them in financial trouble. It is recommended that **the relevant authorities adjust the export taxes on chemical products to the levels prior to 2003, in light of the economic situation and market trends, in order to stimulate the export market and boost demand. Chemical companies should adjust their business strategies in a timely manner. In terms of investment, chemical companies should be cautious with their spending, adopt a strategy of holding back funds, focus on recovering existing capital, promote their products, and increase working capital to prevent disruptions in the cash flow. When purchasing raw materials, they should do so only as needed, reduce inventory levels, and accelerate the turnover of funds ； In terms of enterprise management, chemical companies should strengthen their management practices and reduce production costs through measures such as energy conservation and cost reduction, as well as by tapping into internal potential. Generally, when the economic situation is favorable, it is possible to increase production in order to boost economic benefits; whereas during periods of weak market conditions, the focus should shift from increasing production to reducing consumption and leveraging internal potential to improve efficiency ； For new and expanded projects, companies need to re-apply for approval and recalculate the benefits associated with them. Projects that have good market prospects and require less investment can be started first, while those that involve large amounts of funding should be pursued at a slower pace. However, the research phase for these projects must not be neglected, so that construction can begin immediately should there be any changes in the market conditions.