Weakened by heavy debts, volatile commodity prices and falling demand, Britain’s chemical industry is heavily exposed to the automotive sector. As the Government struggles to ensure the survival of Jaguar Land Rover, a management consultancy predicts that a fifth of the chemical plants in the UK could be forced to close if the economic deterioration continues.

Companies making plastics, paints and adhesives are suffering from an unprecedented drop in demand. Without a pickup in volumes, there will be a shakeout among chemical manufacturers, forecasts Bain & Company. An industry worth £50 billion in revenues and employing 214,000 people in Britain could face plant shutdowns.

These may not be temporary measures, said Mark Porter, a Bain partner: “If plants close, they may not be replaced when the sector recovers.”

The slowdown is hitting Europe’s chemical sector at a time when new capacity is being brought to the market from the oil and gas producing countries of the Gulf.

Mr Porter said: “In polyolefins [raw materials for plastics], an extra 10 per cent capacity is coming on the market over the next 18 months. The impact will be that less competitive plant, typically in Europe or the US, will be mothballed.”

He reckons the closures could represent up to 20 per cent of Europe’s plant, including that in the UK, which would entail a continuing slump with cost pressures from an oil price recovery, Middle East imports and further relocation offshore by chemical users.

The last round of cost-cutting has not been enough, Mr Porter believes. “I hear company directors talking of a 15 to 30 per cent fall in demand,” he said. “If there is no recovery by the end of the first quarter of 2009, we will see another round of cost-cutting.” There will be winners and losers. Those with strong balance sheets and efficient new plant will do well and are likely to take advantage of the down-turn. Among these will be Middle Eastern companies such as Saudi Basic Industries Corporation, which has expanded into Europe and America, buying DSM and GE’s plastics division.

Groups that borrowed heavily for growth in recent years may find the environment challenging next year, Mr Porter believes. “Private equity firms that bought in 2001 and 2002 are doing very nicely. Those that bought in 2006 and 2007 will be feeling the squeeze,” he said.

The credit crunch is already affecting the sector. Ineos, the chemical group owned by Jim Ratcliffe and which is Britain’s biggest private company, recently had a difficult round of talks when it attempted to renegotiate the terms of a €7 billion (£6.7 billion) loan taken out in 2005 to finance the acquisition of Innovene from BP.

The company wanted to secure a waiver from covenants on interest cover and the level of debt in relation to earnings. However, Ineos had to raise the cost of the loan by offering between 175 and 225 of additional interest margin to secure the backing of the loan syndicate.

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