Weekend reports suggested Ineos must raise new money. Bill Gleeson explains why

INEOS Group enjoyed a rapid rise to prominence in the chemicals industry in the past 12 years. However that largely acquisitions-fuelled growth rate has now come to a grinding halt.

Far from growing, the company, which owns the Ineos Chlor plant at Runcorn, is set to shrink in the coming months as it seeks to keep its nervous bankers sweet.

The company has suffered the multiple whammies of rising raw material costs, falling bulk chemical prices, slack demand during the recession, new overseas competition, adverse exchange rate movements and rising interest charges. To cap it all, it has to service a growing staff pension fund deficit.

These gathering problems caused Ineos auditors to raise doubts about its ability to trade as a going concern when the company filed its most recent group accounts at Companies House.

Ineos’s rapid growth has come from almost nowhere. The company, which didn’t exist 12 years ago, now has annual sales of 30bn euros. It has been created through the acquisition of what some observers have called unloved assets. These include the Runcorn plant, which was bought from ICI in 1998.

The massive electrolysis plant there churns out tonnes of chlorine used in a wide range of applications, including everyday plastics. It was an ageing plant, and there have been suggestions that Ineos overpaid for it.

The scale of Ineos’s problems matches its status as Britain’s biggest privately-owned company.

Its accounts for the year to end December ‘08 – filed in November ’09 – show how margins have been squeezed. Operating profit fell from 1.2bn euros in ‘07 to a loss of 252m euros in ‘08.

Such deterioration in trading performance is bad enough, but matters are compounded by the way Ineos owner Jim Ratcliffe has chosen to finance his empire building.

The balance sheet shows debts totalling in excess of 7bn euros, incurring annual interest charges of more than 800m euros. Little wonder then the company decided not to pay any dividends to shareholders last year.

Despite the difficult circumstances, the company has recently succeeded in clinching its bankers’ agreement to a five-year plan to repay its debt. However, while this takes some of the immediate pressure off, Ineos is not out of the woods yet. It must repay 1bn euros of its debt before next year.

As a result the firm is looking for either new investors to pump in fresh capital in return for a stake in the group or a sale of some of its operations. Just last month Ineos raised 350m euros from the disposal of its Runcorn based Ineos Flor plant to Mexico’s Mexichem. Last weekend Saudia Arabia’s state-owned chemicals group Sabic and Kuwait’s Petrochemical Industries Company were reported to be interested in doing a deal.

A spokesman for Ineos told the Daily Post that the worst is behind the group.

He said: “Ineos has weathered the current recession well.

“It has stabilised its business, met budget for the full year 2009 and is trading in line with its business plan. Full year earnings before depreciation, interest and tax for 2009 were 1.222m euros compared to 594m euros in 2008.

“Its financial performance is expected to continue to improve through 2010.

“Ineos has been open about its plans to further strengthen its balance sheet, which includes discussions with a range of investors about possible opportunities, but that we have no pressing need to do any deals given our current performance.

“If a strategic equity investor brought additional benefit to the group then we may consider the options presented, but if not, then we continue running our business through the upturn.

“Given the scale of Ineos’s world-wide operations and breadth of its markets the company is always looking at value creating opportunities to grow its business.”

The earnings figure however is only a partial measure of either profitability or its ability to pay interest charges.

Plainly, interest, depreciation and its other charges are likely to wipe out most of the figure quoted above when full accounts are filed at Companies House later this year.

But even if Ineos’s current difficulties are resolved, it may still struggle in the longer term to compete with overseas competition, particularly for mass-produced chemicals like those made at Runcorn.

Nor is Ineos the only UK chemical firm facing big challenges. The rest of the chemicals sector is also affected.

Accountancy firm KPMG warns the European chemical industry is set to face serious challenges over the next five years. The firm forecasts that 20% of the sector's base chemical capacity may become unsustainable by 2015.

With global demand collapsing in the wake of the recession and increased competition from low-cost suppliers in the Middle East and China, the European chemical industry is walking uncertainly into the dawn of a new era for global chemical production.

KPMG believes that companies across the sector will now be forced to take even more severe action by closing unprofitable facilities which will be impacted by new, more efficient plants planned to come on stream outside Europe.

Chris Stirling, head of KPMG's chemicals and pharmaceuticals practice in the UK and Europe, said: “Current forecasts suggest that globally, there will be a 15% overcapacity in the ethylene production market by 2015. As a result, as many as 40 of the 200 ethylene crackers around the world may no longer be economically sustainable, with 14 of these at risk in Europe. Closure of these plants could prove to be the straw that breaks the camel's back for the European industry, particularly when you consider that at present, the 14 worst ranked plants in Europe account for more than a quarter of total capacity.

“While this is cause for concern, it's important to stress however that I don't believe that death knells are ringing across the European industry just yet. Remember that this remains an industry which employs over 1.2m people and contributed in 2007 to a European Union trade surplus in chemicals of €35.4bn. So, while there's no doubt the shape of the global industry is changing, there are steps that can be taken to ensure that European businesses continue to punch their weight on the world stage.

“Companies need to make hard choices to rationalise unprofitable facilities that cannot compete with newer plants being built outside Europe and instead, ruthlessly focus resources and investment on those chemical clusters which do remain competitive.

Additionally, they should also try to capitalise on their historic advantage in innovation to stay ahead of the competition, especially in terms of developing sustainable solutions that will undoubtedly become increasingly in demand over the next few years.

“European firms should actively seek beneficial joint ventures and strategic alliances that provide access to both cheap Middle Eastern feedstocks and the burgeoning Asian markets. While such joint relationships should be seen as an opportunity to develop a presence in new overseas territories.”

Arguably, ICI foresaw the troubles afflicting the bulk chemicals industry when it switched its attention to speciality chemical production a decade ago.