A sudden collapse in demand for plastics has forced Ineos, a leading chemical company, into talks with its bankers about the renegotiation of the terms of billions of dollars in loans.

The huge chemical company, which is owned by Jim Ratcliffe and ranks third in the global chemical rankings, has begun negotiations with a banking syndicate led by Barclays and Merrill Lynch. Ineos is seeking a waiver of two covenants in an agreement covering a €7 billion (£5.9 billion) syndicated loan.

Ineos took out the loan in 2005 when it bought Innovene, a chemicals business spun out of BP. The Ineos empire has been built over the past decade mainly from assets bought from big oil and petrochemical groups, such as Amoco, BP and ICI, but Ineos has been caught by surprise in the sudden downturn. Tom Crotty, its chief executive, said that there had been a sudden fall in volumes. Shipments to customers were running at between a quarter and third of normal levels.

Mr Crotty said: “We have seen something unprecedented. Our customers are closing their plant or destocking.”

The collapse in demand has made it impossible for Ineos to forecast the future of its business and it is seeking to persuade its bankers to accept a temporary waiver of covenants relating to interest cover and the proportion of debt in relation to earnings.

In return, Ineos has agreed to pay a one-off fee of €30 million and to increase its interest payments on the loan by between one percentage point and 1.2 percentage points. The cost of the higher rates might add €50 million to an interest bill running at about €600 million.

The Ineos loan is backed by one of Europe’s biggest banking syndicates, a total of 230 institutions. Ineos needs to secure agreement from two thirds of those banks that choose to vote on the matter.

Mr Crotty said that Ineos was in good shape and did not have liquidity problems. Earnings have been hit by stock losses because of the falling price of crude oil and by disruption in its American operations caused by Hurricane Ike. Earnings were down from €504 million in the previous year’s third quarter to €402 million. Mr Crotty is expecting operating earnings of €560 million in the fourth quarter and about €1.7 billion for the year. That is enough to cover a €600 million interest bill. The problem is the state of customer demand next year.

However, the company is at risk of breaching a covenant that restricts debt levels to 4.6 times earnings.

Mr Crotty believes that destocking will be over in January, but Ineos is nevertheless cutting capital spending plans. Last year’s €650 million budget is to be reduced to €250 million. Mr Crotty said: “We are a capital-intensive industry. We are cutting out growth in capital expenditure. We are battening down the hatches.”

Job losses are on the cards, but these are likely to be mainly among Ineos’s contractors, Mr Crotty said. The company, which employs 16,000 workers, was hit by industrial action this year when staff at its Grangemouth refinery walked out over its plans to end their final salary pension scheme.

With shipments to customers low, Ineos is operating its plant at only 70 to 75 per cent of capacity. Typically, a chemicals manufacturer will seek to operate at more than 95 per cent of capacity to make the most of expensive assets and to maximise efficiency.

Mr Crotty said: “It’s not sustainable for anybody in the long term. We won’t see a proper recovery until next year.”

Although the price of crude oil has come down sharply, the cost of chemical feedstocks, such as ethylene, a gas used in manufacture of plastics, has not fallen at the same rate. As a result, the price of chemicals has stayed high despite the sudden decline in demand.

The credit crisis, which is affecting consumer industries and construction, is hurting chemical companies. The poor outlook has hit shares in leading players, such as BASF, of Germany, and Dow Chemical, of America.

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