15 September 1997 00:00 [Source: ICB]
Occidental Chemical (OxyChem) is concentrating on speciality chemicals in a bid to avoid the cyclical nature of the petrochemical and chlorvinyl markets. Using cash from its bulk businesses it will focus on niche acquisitions. Peter Taffe talks to president and chief executive officer Roger Hirl about the firm's change of direction.
A large chunk of Occidental Chemical's (OxyChem) past investments has been directed towards its petrochemicals and chlorvinyl businesses. But as these commodities have been hit by the cyclical nature of the markets, the emphasis has switched to speciality chemicals using the cash generated out of bulk businesses to fund their growth.
Roger Hirl, president and chief executive officer (ceo) of OxyChem, says the firm's low point in 1992 of earnings of only $100m on sales of $5bn was 'an unacceptable situation'. So the focus is on raising that floor, or trough earnings, in the chemical cycle to $600m while at the same time not jeopardising opportunities on the up-cycle to earn more than $1.5bn.
'The approach is to continue to invest in production cost reductions and incremental capacity expansions of large-volume products, and then put a greater emphasis on the specialty business area, including differentiated commodities that have a much less cyclical earnings nature,' he says.
'Since that period of low earnings levels, we have sold off some highly cyclical businesses and carved out many significant costs. The strategy is to continue to make the large-volume, commodity-orientated businesses more productive and boost the specialties group.'
The first part of the strategy applied to OxyChem's petrochemical arm is the responsibility of Ronald Schuh, an executive vice president. 'Our objective is to have no losses and some marginal profits during the bottom of the cycle and ride the curve up on the good times,' he says. 'We have done this by spending some money, but not substantial investments, on managing costs and on value-added areas, such as coproduct upgrades.'
OxyChem is slightly unusual for a US steamcracker operator in that it cracks a heavier feedstock slate of 70% liquids and 30% NGLs, making it more like a European operator, notes Schuh. Hence, for the 1.6m tonne/year of ethylene it produces, OxyChem makes more than 3.3m tonne/year of other products, including propylene, butadiene, aromatics and isoprene. Says Schuh: 'There is a growing need for these coproducts and we have those molecules trapped in our process.'
In the meantime, he sees difficult times ahead for the US ethylene industry. With the equivalent capacity of three-and-a-half crackers coming onstream, he expects operating rates to fall into the high 80s by the middle of next year. However, if the ethylene price falls to the level of covering full costs for the new crackers, OxyChem will still be able to make a small return on depreciated assets.
The new crackers are based on light feedstocks and do not produce much propylene, adds Schuh. 'I believe that propylene will become a more valuable petrochemical.' Last year, OxyChem expanded polymer grade propylene capacity by 23 000 tonne/year at Corpus Christi, Texas. He predicts that propylene will keep a relatively close profile to the ethylene price, but that the 'double dip' fall seen in the previous cycle will not occur.
Butadiene will tend to be a better business over the cycle and the market will remain fairly good until Shell's Deer Park plant comes back onstream, says Schuh. 'The only problem is that some butadiene customers are seeing severe competition in their markets.' Schuh describes the benzene business as 'a freely floating commodity that equates to a parity around the world'. The market is firm now, but in the long term 'it will continue to have problems due to the new TDP (toluene disproportionation) plants that will produce benzene in place of the HDA (hydrodealkylation) units', he notes. The TDP plants are also the reason for the high toluene prices in relation to benzene.
OxyChem is the US's third largest producer of ethylene oxide (EO) and ethylene glycols (EG), which are expected to make a profitable contribution to the petrochemicals business. Schuh notes that little capacity has been added in the US, although the company recently expanded its EO unit at Bayport, Texas, by 68 000 tonne/year to an optimum plant capacity of 340 000 tonne/year. 'We expect EO/EG to be strong at least through 1998 and probably 1999,' he says. 'This area is a good balance for our businesses.'
Capital investment in petrochemicals over the next couple of years will be around $50m/year, which does not include the requirements for ongoing maintenance and health and safety reasons. The focus will be on downstream products, such as the investments already taking place in dicyclopentadiene and resin oils, and plans for more EG derivatives. Investment will also be made in new infrastructure, such as pipelines and extra storage capacity, to increase the crackers' flexibility.
OxyChem has not joined the rush to invest in petrochemical capacity in Asia, however. 'Some large corporations have gone into Asia with a vengeance to participate and have over-saturated the markets,' says Schuh. 'The returns are not going to look good for a long period of time. Only those with patient money will benefit.'
OxyChem's other commodity arm is its chlorvinyls group, which was recently formed by the combination of its basic chemicals and polymers and plastics business units. Hirl explains that the businesses have always been in constant touch with each other and the new group was basically an integration of the management.
He also notes that OxyChem's main competitors operate their businesses as integrated units 'from salt to PVC resin, and sometimes PVC pipe. My decision was to have one unit manage the business on an integrated basis to supply PVC resin to our customer base on a competitive basis.'
OxyChem has been investing in new capacity for the chlorvinyls group. It is now adding 198 000 tonne/year chlorine capacity at three Gulf Coast plants due for completion by the end of 1998. This will bring OxyChem's total domestic chlorine capacity to nearly 3m tonne/year.
Nearly 60% of the chlorine is consumed in the vinyls product chain. At Ingleside, Texas, the OxyMar VCM plant, jointly owned by OxyChem and Japan's Marubeni, has just been expanded by 50% to 950 000 tonne/year. This is being followed by a 200 000/year expansion of PVC capacity at OxyChem's plant in Pasadena, Texas. When completed this October, it will bring the company's total capacity to around 900 000 tonne/year.
OxyChem has no further significant investment plans for the time being. However, Hirl reveals: 'We have made a decision to integrate the business more downstream into PVC resin.' With the Pasadena plant expanded to maximum capacity, any new PVC capacity is likely to be added at its EDC/VCM production sites.
The company's third arm, speciality chemicals, is now the focus of attention. 'The target for 2000 is to have a business of sufficient size to be selling at a revenue level of $1bn and an anticipated income of $250m,' says Hirl.
The speciality businesses produce primarily organic compounds, intermediate chemicals and chlorinated isocyanurates. Hirl sees opportunities in supplying chemical intermediates to agrochemical and pharmaceutical manufacturers. 'As they concentrate their efforts on the discovery of new drugs and products, they have less time to make the molecules,' he says. He also notes that some of these feedstocks and base products are imported into the US.
OxyChem claims to be the world's largest manufacturer of phenolic moulding compounds and one of the three largest producers of speciality phenolic resins in the US. It recently commissioned a new glass-filled phenolic moulding compound facility jointly owned with Sumitomo Bakelite at Fort Erie, Ontario, Canada. The two companies also have a joint venture project in Southeast Asia.
OxyChem claims top position in chlorinated isocyanurate products, which are used primarily as swimming pool sanitisers and household and industrial disinfectants. Other major areas are its chrome chemicals businesses and sodium silicates and detergent silicates.
More than $70m is being invested in expanding and upgrading facilities at its Niagara Falls, New York, complex. This includes a third isomer column to be added to the orthochlorotoluene/parachlorotoluene separation unit, an increase in orthochlorobenzyl chloride capacity and an update of the hydrogen fluoride handling systems. A new parachlorobenzaldehyde facility is also being built. All projects are expected to be completed by the end of 1998.
OxyChem is also investing $17m to increase speciality chemicals production at its Ashtabula, Ohio, plant. Completion is scheduled for mid-1999. The expansion will help OxyChem launch new products to serve the agrochemical and pharmaceutical intermediates, coatings and polymer additives markets.
The company has also been actively buying into companies. It has taken a 64% share in Indspec Chemical, the world's largest and North America's only producer of resorcinol. Its primary use is as a bonding and stiffening agent in the manufacture of tyres, but it also has applications in wood adhesives, flame retardants and pharmaceuticals.
The acquisition of Laurel Industries makes OxyChem the number-one producer of antimony oxide with facilities in La Porte, Texas. The product is used as a flame retardant in polymers, complementing OxyChem's other flame retardant products, and as a polymerisation catalyst in the manufacture of PET resin.
Natural Gas Odorizing, which was bought from Helmerich & Payne, is a major producer of mercaptan-based warning agents used in natural gas and propane. Additional applications for these chemicals are as intermediates in the agrochemical industry. Manufacturing facilities are in Baytown, Texas.
The purchase of a sodium silicates plant in Augusta, Georgia, augments OxyChem's five existing plants and increases its presence in the growing southeast US region. These silicates are used in soap and detergent formulations, paper manufacture and other applications.
'We will bring these pieces together and are on the right path to having a company with adequate mass to be a significant specialty chemical producer,' concludes Hirl. The future will also focus on niche acquisitions.'
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