Shorter product life cycles, global competition, environmental issues, emerging technologies and new materials are forcing the global chemical and oil industry to transform.

The credit crunch added further pressure, pushing global manufacturing demand off a cliff, and with it the demand for energy, commodities and chemicals.

SA companies such as Omnia, Afrox, AECI and Sasol are in the direct line of fire. "Chemical companies are facing big issues," says Coronation Fund Managers analyst Henk Groenewald. "The challenge is not so much global prices, but whether they are able to maintain volumes."

At Afrox volumes as well as sales, pricing, cash flow, manpower and production costs are under pressure. Volumes in the last quarter to December 2008 declined by 25% as customers like Mittal Steel cut down on production. "We do not expect any significant reversal in the short term," says MD Tjaart Kruger. As opportunities narrowed in 2008, the gas and welding products supplier felt the pressure of fierce competition and had to embark on "a rigorous pricing regime" to protect its market share.

AECI, which supplies explosives and chemicals to the mining and manufacturing industries, is in a similar boat. In the year to December revenue increased 48% to R12,8bn, driven by good customer demand and rising commodity prices in the first nine months of the year. But in the last quarter things changed. Key customers in the mining sector were under pressure. "Lower commodity prices are resulting in lower returns for customers in this sector as well as companies supplying the retail, manufacturing and automotive sectors," says Groenewald.

Says AECI CEO Graham Edwards: "Volumes for both mining and manufacturing dropped way down in the last quarter."

In these circumstances smaller competitors panic, he says. "They are squeezed for cash, so they push prices down to get rid of stock." The entire supply chain is reducing stock levels. "This eventually works its way through the system, but it makes forecasting future demand very difficult."

Omnia, which supplies products into the mining and agriculture markets, as well as to the broader chemical distribution market, is also unlikely to repeat the turnover growth of last year. Its most recent results show the company benefited from a weaker rand and strong growth in its core areas of mining, agriculture and manufacturing. All three business divisions grew beyond 50% for the six months to September 2008.

Since then demand has slowed down in some of its markets. However, Omnia CEO Rod Humphris is looking beyond the challenges. "The underlying trends have not changed: the world is still short of grain and the population is growing. With the demand for food increasing, agriculture has to be one of the critical industries of the 21st century."

Of course, the demand for energy and consumer goods will also return. "Eskom is planning another 20 coal mines by 2010 and Africa remains an important source of undiscovered minerals."

It is in the short to medium term that there is less visibility.

Sasol's diversified business is helping it manage the good with the bad. On the fuel side it is maintaining its volumes.

Conditions are tougher on the chemicals front, which is an increasingly important component of the overall business, says Groenewald. "Lower oil prices will have a positive effect on feedstock costs in the chemical businesses, but demand is falling."

A future this uncertain has made all of these companies more cautious in their outlook. Sasol, for one, has entered into a cash conservation mode - even though in the six months to December the company generated cash of R30,8bn (up 118% on the previous period) and has a strong balance sheet. "We do not expect oil and product prices to recover in the short term," says chief financial officer Christine Ramon. "We believe that it is wise to plan for an extended period of suppressed and volatile market conditions."

As a result, management has renewed its focus on cost containment, improving operational efficiencies, working capital improvement and capital expenditure reprioritisation. It has suspended its share buy-back programme and lowered its gearing target range.

AECI's Edwards agrees that cash preservation is a priority. "We are working on controlling working capital aggressively, progressing key capital projects, delaying replacement capital spend, while protecting market share and margins."

He says the company will not close big plants, but will "ride up and down on the cycle", though one or two areas may need attention. "We may have to consider shorter weeks, or possibly more permanent interventions."

Like AECI, Afrox has also been affected by the 35% contraction in the motor industry, and has curtailed its spending as a result. Management plans to reduce head count by 15% and make operational and structural changes to save R200m by year-end.

Afrox supplies largely to the automotive, manufacturing and metals industries. "They are in dire straits," says Kruger.

The chemical industry's cautious approach in an uncertain environment does not suggest growth projects are being shelved. "Prefeasibility and feasibility studies relating to large growth projects will continue," says Ramon.

Sasol is continuing its efforts to further commercialise its technology globally. It is involved in a feasibility study with its partners in China into the possibility of building a CTL plant with a potential capacity of about 80 000 b/d. That said, the merits of every investment will be rigorously assessed.

Afrox plans to see its R1bn capital expenditure programme through to the end. Its carbon dioxide plant was successfully commissioned at the end of last year, the Kuilsriver air separation unit has been commissioned and the Gases Operations Centre in Germiston will be finished this year.

Similarly, AECI's R1bn plus investment in new capacity will be completed by 2010, though Edwards says all capital projects have been reviewed.

This year the sulphonation plant at Chloorkop, the second xanthate reactor (xanthates are flotation agents used in mineral processing), the acrylamide and polyacrylamide plants as well as the carbon disulphide plant at Sasolburg will be commissioned. In addition, an oleochemical plant has been commissioned in Brazil. The investment pushed AECI's gearing to 59% at year-end, up from 25% in 2007. "All of our businesses are involved in big capital projects - it is unusual that it all happens at the same time. But the advantage is that we can bring them on line while things are quieter," says Edwards.

He is relieved that the capex cycle was planned 18 months ago and the three- to five-year debt facilities were established early last year. "This will see us through the cycle to 2012. At that point we can decide whether to extend them."

SA's chemical and oil companies are investing significant sums in modernising their plants and extending capacity. Provided debt remains well managed, they should be in good shape for the upswing in the world economy.