A feel for fibres

04 May 1998 00:00  [Source: ICB]

New owners are emerging in the European fibres business and many believe the merging focus on downstream markets will be the boost the industry needs. Marjorie Walker reports.

Fibres in Europe is a difficult business to be in. The steady increase in textile and fibres imports is nothing new, and pricing has always had its ups and downs, although recently prices and profits have been very hard hit by overcapacity and the Asian crisis. What is new is the number of businesses changing hands as their owners opt out, in the belief that something radical has to be done to arrest the downwards spiral. New owners are emerging, largely from the textiles world, and many fibres players are optimistic that this new focus on downstream markets will be the boost the industry needs. 'It is', one player said, 'very different to be owned by someone who wants to be in your business compared to years of ownership by a firm that did not want to be there and operated the business as a cash cow to finance other developments.'

Over the past weeks Akzo Nobel has announced its bid for Courtaulds and received an almost indecently quick capitulation by the Courtaulds board. The combined fibres businesses will then be spun off as a separate company. April also saw Hoechst finally announce the disposal of a major portion of its Trevira business to the Koch/Saba consortium. This followed an earlier agreement with Indonesia's Multikarsa, relating to the group's acquisition of 60% of Hoechst's European polyester textile fibres business.

Another Indonesian player Indorama took over Kemira's viscose business in 1997. Rhône-Poulenc is to spin-off its Rhodia chemical business with Rhodia affirming its commitment to polyamide where it has a strong asset base and technical leadership position, but ready to offload its polyester interests. DuPont, having earlier in the decade taken on board ICI's polyamide business, came back for ICI's polyester polymer and PTA businesses and completed the takeover this year. Montefibre's fibre business is said to be flourishing under its new ownership by textile player, Orlandi. And all over eastern Europe fibres businesses are for sale and attracting interest worldwide.

Preliminary figures compiled by Cirfs, the international rayon and synthetic fibres committee, suggest that 1997 western European fibre production (excluding Turkey) at 3.7m tonne, is an all-time record, despite the 23% rise in imports. The 1997 figures represent a 5% hike on 1996 production of 3.5m tonne and these early figures could be an underestimate as data on PP fibres, one of the fastest-growing segments of the market, is still not available.

Viscose, as in 1996, was a weak performer with production showing no change on the previous depressed year, although producers say that by the last months of 1997 demand was beginning to pick up and in the first months of 1998 the improvement continued. Polyester fibre production is up 10% despite import pressures, and polyamide up 6%. Acrylic fibre production rose 3%.

Sales may have been up in 1997 but the ownership changes in European fibres are being driven by a range of negative factors. The European fibre industry has been under siege for some time from fibre imports and from textile imports that have been eroding the textile customer base in Europe.

In 1997 fibre imports into western Europe rose 23%. It could be argued that this was a uniquely bad year. The combination of structural oversupply in polyester that sent polyester and other fibre prices crashing in Asia, encouraged Asian producers to seek export sales in the West where prices were more attractive.

The economic and currency crises that have left many Asian firms struggling to meet dollar-denominated debt repayments means many Southeast Asian players are operating in survival mode. Cash flow is more important than making profits and fibre exports at rock bottom prices have hit the European market. Fibre players believe these low import prices are not sustainable and claim there are signs these distressed sales are beginning to tail off.

Even if this is true there is little cause for celebration. Currency devaluations in Indonesia, Thailand, Malysia and South Korea are likely to support increased textile exports to western Europe, particularly if domestic demand in these countries continues soft. European business could be won at the expense of other Asian producers like China which have refused to consider devaluation but it is also likely to be won from European textile and fibre producers.

Textile quotas, agreed under the Multifibre Arrangement (MFA), still apply to imports from these countries. The primary purpose of the MFA, when agreed in the 1970s, was to protect production and employment in the US and Europe in politically sensitive manufacturing sectors. However, another round of damaging quota removals agreed under the Agreement on Textiles and Clothing (ACT) is only four years away with all quotas agreed under MFA eliminated by 2005. At present only these MFA quotas and the possibility of instigating anti-dumping action protects European production and jobs in the textile and fibres industries.

Several of Europe's leading chemical companies have assessed the situation and decided to vote with their feet. The fibres business is the poor relation when compared with the pharmaceutical and healthcare or speciality chemicals businesses. Shareholders do not rate fibres. They believe the sector will never offer satisfactory returns; the return on capital is not even close to covering the financing costs of new capacity. For years European chemical companies have run their fibres businesses as cash cows financing their developing businesses. But this policy cannot be successful for ever. There comes a time when investment has to be made to survive. Courtaulds and Lenzing have invested, in the new fibre lyocell, and in each case the lead-time to profitability has created major problems; in Lenzing's case the departure of chief executive officer Heinrich Stepniczka, while Courtaulds was left with little defence when Akzo Nobel put in its bid.

The sale of businesses has resulted in the new owners, with a few notable exceptions, emerging from the global textile industry, an industry where private family ownership is still common and attention is focused on cash flow and a growing asset base rather than return on capital. Domo, the Belgian carpet firm, Orlandi, the Italian textile company, Isaac Saba, the Mexican textile and fibre player, the Indonesian players Indorama and Multikarsa all have their roots in textiles rather than chemicals and foresee a more attractive future for fibres under their ownership than the companies queueing to sell or spin-off their businesses.

This is something that makes fibres players, which have exchanged or are about to change ownership, increasingly optimistic on the future of the European industry. Europe's fibre production is moving away from owners who did not want to be in the business and were not prepared to invest in its future, to owners who want to make it work.

Textile producers are moving upstream because the opportunities are there - fibres businesses are for sale all over Europe and the US, but also because world-class technology, particularly for polyester fibres, can now be purchased 'off the shelf'. There are no effective barriers to entry in polyester. This is not so true of polyamide 6,6, although polyamide 6 technology is readily available, or in acrylics where buying into existing operations is the best route. The absence of barriers to entry and the resulting overcapacity and price slashing competition has pushed three of the world's largest polyester players onto the market over the past years. Montefibre's sale of its polyester and acrylics business had been anticipated for some time. ICI had already disposed of its polyester fibres business in the early 1980s but had developed a strong global position in PET and PTA and it came as a shock to the market when news broke that this business was up for sale. By the time Jürgen Dormann had affirmed his commitment to life-sciences and began ring-fencing Hoechst's other major chemical businesses, Trevira's sale raised few eyebrows.

Courtaulds accepts bid The second major fibres deal, Akzo Nobel's agreed 450p ($7.5) bid for Courtaulds, has very different credentials to the Trevira deal. There is no upstream or downstream integration although that could emerge in the future if the business is sold rather than demerged to existing shareholders or floated on the market. There appears to be few synergies between the businesses. In spite of Cees Van Lede's protestations that it is a two-leg deal - coatings and fibres - there is a strong feeling among fibre players that the deal was based on the needs of the coatings business - a pre-emptive strike to secure what is essentially a marvellous product and geographical fit in coatings, before any other paint producer had time to play his hand.

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In March Courtaulds announced its intention of demerging the fibres business as part of a restructuring plan that sent the share price sharply higher - ahead of the Akzo Nobel's bid. Akzo Nobel too had made it clear that the return on capital achieved by its existing fibres business was unsatisfactory. Van Lede speaking in London recently admitted to fibres second-class citizen image and the impossibility of it ever achieving the 20% return on capital available from pharmaceuticals. Instead he emphasised its cash generative qualities and the size of the combined fibres businesses that will be on a par with the top league players. The question is whether two unsatisfactory businesses can be transformed into one saleable one. Akzo Nobel's acceptance that it might have to be demerged to shareholders suggests a lack of confidence.

One player spoke of a hotchpotch of unconnected businesses. This is not how Van Lede sees things. He sees a business with leading positions in their markets and where the combined businesses will generate enough cash to finance their growth - much of the development money has been spent now - and at the same time pay good dividends to shareholders. Certainly Courtaulds and Akzo Nobel have market positions ranging from world number one to number three in every sector. The exception is acetate tow and flake at number five. In Europe, with the exception of non-wovens where Akzo Nobel is European number three, the firms are either number one or two in every sector.

One quarter of sales, about Dfl1.5bn ($732m), will come from high growth products. These include Akzo Nobel's aramid high-performance fibre, nonwovens, membranes used in dialysis and Sympatex, a breathable membrane used in wind and waterproofing garments and shoes. Included in this high growth sector is Courtaulds' lyocell. So far £300m ($480m) has been spent on developing lyocell with little to show in terms of returns.

However Van Lede compared it to the £300m he estimated both DuPont and Akzo Nobel had spent developing aramid, where the lead-time to profitability had been nerve-rackingly long - about five years. He believed lyocell staple fibre, marketed by Courtaulds as Tencel, was ready to break through to profits after the hiccup in 1997. Completion of the 42 000 tonne/year Grimsby, UK, plant has been delayed but it will be onstream in quarter three, a full nine months behind the 12 000 tonne/year Lenzing's lyocell plant that came onstream at Heilegenkreuz in Austria this year. Courtaulds and Akzo Nobel are jointly developing lyocell filament, or NewCell.

The major problem area for both companies is the viscose fibre area that will account for a further 25% of the combined business. Sales crashed in 1996 and only held steady in 1997. Production in Asia has run ahead of supply and in Europe overcapacity has become a major issue in the viscose staple sector where estimates put demand 15% behind capacity. Courtaulds has responded to this with a 25 000 tonne cutback in production at the Grimsby site but players believe other cutbacks are needed. However the merger of Akzo Nobel's and Courtaulds' businesses does little to enhance the prospects of further cutbacks as there is no overlap in the viscose businesses.

Akzo Nobel's involvement is in the smaller viscose filament market, a market where overcapacity is not a problem, although there is a problem getting acceptable returns.This is being tackled by moving 1000-2000 jobs to Poland where labour cost is one-quarter of the cost in Germany and Holland.

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