21 October 1996 00:00 [Source: ACN]
Many key players in the Australian chemicals industry are part of larger European companies. Will this connection help them ride out the current depression in the sector Down Under? Parry Ray Dhillon reports
THE Australian chemicals industry is facing difficult times. The market is flat, if not in decline, and there is no quick fix on the horizon. Growth will come next year, it is hoped, but experts say 1997 will offer no more than a slow recovery at best. Can the key players with European parent companies find more resourcefulness, creativity and support than before to help them succeed in this sometimes remote marketplace?
'Being in Australia means you have to create awareness of the market at your corporate headquarters. Although the market is mature, there is a wide range of manufacturing and distributing opportunities,' says Hoechst Australia's managing director, Jens Mohr.
'Often the parent company does not view Australia as an strategic option.
'The ambition is lacking to cultivate the market like other global regions. In its favour, however, is the strong resource of high skills, creative thinking and sophisticated products. The continent differs from Asia where, in certain countries, there may not be such a good balance,' he adds.
In Australia, Hoechst's key activity areas are pharmaceuticals, under the Hoechst Marion Roussel banner wholly owned by Hoechst AG, and agrochemicals, through AgrEvo, a joint venture between Hoechst AG and Schering AG.
Hoechst Australia's responsibility lies in the operation and growth of industrial chemicals, plastics such as hdPE and PP, masterbatches, pigments, surfactants and auxiliaries.
Veterinary products are marketed through Hoechst Roussel Vet.
The plastics businesses are strongly regarded by the parent as a European product, Mohr says, although there are other satellites in South Africa and Brazil, both joint ventures.
Australian capacity stands at 70 000 tonne/year of hdPE and 25 000 tonne/year of PP, after an expansion in 1989. There are no plans for further growth.
'The message from Germany is a tough one - manage your own market. So although the business is part of the European company, you are in a sense independent. To be successful, you have to understand the market and look for new areas of growth,' says Mohr.
Recent growth has been generated from surfactants, which was expanded in Q2 1996, and masterbatch products. Speciality chemicals expansions are also underway.
Areas earmarked for growth are specialities, inorganic and organic pigments, resins, paints and food additives.
Hoechst Australia's role focuses on the domestic market and New Zealand, although Mohr anticipates the situation will alter over the next few years as it starts to export speciality chemicals into Asia.
But the climate for growth is not favourable. This, coupled with the fact that the percentage of imports is set to rise over the next few years, makes it even harder. 'However, domestic manufacturers prefer local suppliers and in many cases are prepared to pay a premium for that,' says Mohr.
This is reflected in Hoechst Australia's production sales. Some 90% of production goes to Australia and 10% to Southeast Asia.
Mohr adds: 'Another problem is that Southeast Asia has developed a great deal of capacity of its own which poses a threat to the Australian industry.'
THE level of support and integration with the parent varies from case to case. For example, Warren Haynes, ICI Australia's managing director, paints a more positive picture. 'We are out to maximise shareholder value in our markets and ICI plc supports that.'
ICI Australia has six core businesses. Its profile differs from ICI plc because it has been engineered to suit the Australian market.
Says Haynes: 'Primarily, we operate in Australia, New Zealand and the Pacific Islands and we have not run out of opportunities yet. 'Of course there is some overlap with our parent company, namely in paints, explosives, surfactants and polyurethanes. The link is sharing technology and participating in strategic direction.'
ICI Australia's businesses are growing, says Haynes. Its plastics business has recently been enhanced by two investments. A A$230m (US$190m) ethane pipeline in Botany came onstream in July this year which, says Haynes, 'should provide significant reduction of net feedstock costs. The change from liquefied petroleum gas and naphtha was made because we had to import feedstocks, and the by-product credits of producing benzene, toluene and xylene are not available in Australia.'
The company has also added 90 000 tonne/year of polyvinyl chloride at Laverton, bringing the site's total to 140 000 tonne/year. This followed the closure of a 50 000 tonne/year vinyl chloride monomer/PVC plant in Botany. It was more cost-effective to scrap and build, the company says.
The Botany plant will continue to make ethylene dichloride for export to Singapore and other Southeast Asian countries. VCM will be imported for Laverton. Through a shutdown in June to July last year, ICI Australia increased PP capacity from 70 000 tonne/year to 85 000 tonne/year.
Within its chemicals business, ICI Australia has raised cyanide production to 34 000 tonne/year and it has also invested in a magnesium hydroxide plant. Serving as an industrial alkali, the latter is used in environmental waste cleanup.
The plant is expected to come onstream in H1 1997, producing about 50 000 tonne/year. Haynes says: 'This is a new market for us. We have seen the benefits of selling magnesium hydroxide over magnesium oxide, which we currently sell.'
In Botany, ICI Australia's ethylene oxide business is being expanded by 20% and will be completed by H2 1997. This in turn will be fed into surfactants growth.
ICI Australia owns 72% of another regional business, Incitec. It comprises two large ammonia plants in Newcastle and Brisbane. The Newcastle site also produces super phosphate, from phosphate rock and sulphuric acid. Urea is also produced in Brisbane.
Over the past year, Incitec has sanctioned A$27m expenditure to upgrade ammonia at Brisbane. This will lead to a 10% hike in capacity, and more importantly, reduce manufacturing costs by 10%. 'A number of other minor debottleneckings are also planned. The agriculture market has been good this year,' says Haynes.
Advanced Sciences Group forms another business unit. It comprises polyurethanes, pharmaceuticals, formaldehyde resins and scientific instruments.
The capacity of the formaldehyde plant was increased this year from 60 000 tonne/year to 90 000 tonne/year.
Haynes says: 'The paints business group has had a difficult year, primarily because of the building industry. Nevertheless, there are areas of investment with new waterborne automotive paints and powder coatings.'
SCM's managing director, Dennis Payne, says: 'Growth in the building industry is 30% down from 12-18 months ago, which has led to decline in paint and plastics businesses.'
He too highlights his company's growing position. 'At the start of 1996, there were three titanium dioxide producers in the country: SCM, Kerr-McGee, with a chloride plant in Kwinara, and Tioxide, with a sulphate plant in Burnie. But the Tioxide plant closed in June and the market share it enjoyed is now being split by the two remaining firms.'
Payne puts this down to the 'sulphate-to-chloride evolution'.
'At the moment, the balance of TiO2 world capacity is put at 56% by the sulphate route and 44% by the chloride route. However, the shift is towards the chloride route,' Payne says. SCM sees chloride increasing to 58% by 2002 and sulphate declining proportionately, to 42%. 'We are investing in a process that is destined to grow,' Payne adds.
In May, SCM announced plans to add another line to its Kemerton plant, bringing total capacity to 190 000 tonne/year from 79 000 tonne/year. Although construction has been deferred, Payne confirms SCM is proceeding with the engineering design, which is being carried out by a team in the UK.
'It is a positive expansion plan. Initial plans called for the new line to come onstream in the beginning of 1999, but realistically, it will be 2000. There is no denying that the market is going through a significant slump right now and this is why the Kemerton expansion deferral arose. Common sense told us to slow down the expansion,' he says.
Clearly, the Australian operations of European companies are growing at different rates. All are constantly evaluating new business opportunities and trying to establish positions in new specialist areas. But there is no escaping the present poor market.
ICI's Haynes says: 'The Australian chemical market is depressed at the moment. Australia is working at a tariff level of 0-5%, so you have to work hard to be efficient and to justify investments. In 1986, tariff levels were about 30% - that takes a lot of swallowing. There is little protection against imports and you have to export. This pushes you on productivity all the time.'
Hoechst's Mohr cites lack of consumer confidence as a key problem. 'There is no demand from retail and construction industries.' He also says there is a lack of competition in the coastal shipping sector. It is currently cheaper to import from Southeast Asia into Brisbane or Perth than from Sydney and Melbourne.
Payne says: 'Even Asian demand has been poor over the past 12 months. Prices have declined by 20% and customers' inventories have reduced considerably. However, economic activity in Asia Pacific will grow substantially over the long term because there is low per capita demand. This will primarily be fuelled by the engine of China.
'However, all countries, apart from Japan, Australia and New Zealand, will contribute to the above-average growth.'
Clearly, the main focus for Australian operations is the domestic market, but the potential for opportunity in the Asia Pacific region cannot be ignored.
SCM Chemicals Asia Pacific is headquartered in Western Australia and is charged with managing all SCM activities in the region. However, it is closely tied into the SCM global business where there is full recognition of Asia Pacific opportunities.
Payne says: 'SCM has completed a number of chloride capacity expansions in the US and now has excess capacity in Europe and the US. This will be used to seed volumes in Asia Pacific, while we gear up for the Kemerton expansion. When Kemerton comes onstream, it will take over the Asia Pacific market and exports will begin into Europe and the US.'
SCM predicts compound average growth rates from 1990 to 2000 of 5.4% for Asia Pacific, 3.4% for western Europe and 2.9% for US. This is against a total world growth of 3.6% of TiO2 demand. SCM's current market share in Asia Pacific is put at 10% and Payne expects it to grow.
SCM Chemical in Western Australia exports 70% of all its product to Asia Pacific, with the extra output from Kemerton earmarked for export. Clearly there is a vision to manufacture in Asia, Payne says, but it is not in current strategic plans.
He says, 'I can envisage a situation where manufacturing in Asia would be advantageous, perhaps in 6-10 years' time. The question is the size of an individual country's market. When an individual country increases its demand for a product to a certain critical level, then that's the time to act.'
ON ASIA, Haynes says, 'You have to be there, it is hard to run a business otherwise. The Australian operations are growing in Asia with ICI plc's support.
'We are the strongest player in explosives in Asia. We have many customers in the Australian mining industry, and for the last 8-10 years have been running the Asian explosives business,' he says. ICI Australia took over the explosives manufacturer, PEX Philippines, in 1987.
'We have moved into Vietnam and are evaluating a joint venture in China. We have done some contract work in Indonesia and are also looking at investing in ammonium nitrate there.' The Australian company also operates an explosives company in Taiwan, which is owned by ICI plc.
Other Australian businesses include two PE plants, a PVC plant, a PP plant and a cracker. ICI Australia also manufactures oriented PP films and cast PE film. Cast PE film is micro embossed.
As part of the expansion plans in this field, the company has just purchased Horitech, a Malaysian company producing similar kinds of film. ICI may expand embossed film in 1997, to come onstream in 1998.
Haynes says ICI Australia is investigating formaldehyde resins production in Indonesia and China and is evaluating how to enter the two markets. Watercare business studies are also being carried out in Vietnam and Indonesia. He confirms there should be announcements for resins in 1997, with Chinese activities outlined throughout 1997-98.
Mohr says, 'Moves into Asia would not be under Hoechst Australia's jurisdiction. However, our parent company, Hoechst AG, intends to increase the percentage of its business in Asia considerably, especially in India and China.'
Although parent companies are involved to differing degrees, the Australian companies are part of a larger global strategy. With SCM becoming part of Millennium Chemicals, it seems there are exciting times ahead.
Chairman and chief executive officer Bill Landuyt says: 'Millennium as a whole has a very consistent strategy - to create value. At the moment, commodity PE stands at about 40% of Millennium's business through Quantum. In five years' time, this will be less than 20%. There are still growth plans, but specialities and intermediates will be expanded more aggressively.'
He adds: 'Australian expansion is certainly part of the overall growth plan. Millennium is very disciplined with regards to our investment approach. We will not spend money unless we can cover the cost of capital - which is why Kemerton was deferred.'
Landuyt says TiO2 is Millennium's biggest international business at present. 'Where we see an advantage we will drive the business forward. The Australian operation has a responsibility to create value and make decisions pertinent to its market.'
Says Landuyt, 'In the past, SCM could have got a little lost in Hanson's businesses, as it was a small part of the whole. Within Millennium, the TiO2 business is predominant. SCM will be judged on what it does and will have more control on its destiny.'
Haynes says, 'Each of ICI's global businesses has its own strategy - we will be involved in the formation and the implementation of a business if it overlaps with our operations.
'For instance, our paints business is not in Asia, but we provide help in running the Asian businesses. We also export exotic paints such as car refinish paints and specialised paints. On the other hand, our explosives business fits in very well.
'ICI Australia evaluates the regional businesses and takes the good ones into Asia. It is important for us to use the established bases of ICI plc, especially in China and Indonesia.'
He adds: 'There is not a lot of conflict- we can all pursue our own interests in Asia, Australia and worldwide. We achieve synergies working through the country managers and also have strong trading bases. Being independent and being part of a global structure is an important balance to achieve - we have been working at this since 1928.
'In the past ten years, the chemicals industry has become more global and ICI plc has adopted strong global positions.
'We both have shareholder value objectives and achieve these without getting in each other's hair,' Haynes says.
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