Petrofina - going against the grain

21 September 1998 00:00 [Source: ICB]

Petrofina is one of the few companies that has not participated in the rash of consolidations in the petrochemical industry in the past few years. Roisin Hogge asks why not.

Pre-millennial tension has not hit Petrofina. The company refuses to be swept along in the trend for European petrochemical consolidation. It stands almost alone against this tide of big mergers in the industry and is happy to do so.

In a bid to improve efficiency and gain market share, a rash of consolidations has been taking place. The age-old problem of inefficiency in the European petrochemical market plagues the sector, with Europe still trailing the US. Although the European market is currently in the upwards swing and demand is good, US overbuilding in recent years has led to a squeeze on margins. The global economy is certainly not helping the nervous climate with Russia and Brazil just the latest economic crises to hit after that in Asia.

But what should petrochemical producers be doing as the 21st century approaches? The European markets have applauded recent merger announcements and some have claimed that companies like Petrofina should follow suit.

However, Petrofina's head of chemicals, Axel de Broqueville, scoffs at the idea that mega-mergers are the way forward. Indeed, his attitude to these moves is that while seemingly gargantuan they are only superficial in what they achieve.

De Broqueville has always had a hard line on rationalisation, seeing site closures as the only real way of cutting costs and improving efficiencies in the European market. 'Officially what is driving the recent spate of consolidation has been a desire to increase market share, but another reason is to break the national fragmentation of the European market.' But de Broqueville believes these moves are cosmetic and any cost savings achieved will be small.

Consolidation for the sake of gaining critical mass is, he says, a myth, as efficiency is the key to topline performance. 'Size doesn't mean anything if it results in dispersion,' he says. However, he does admit the logic in alliances for adding strength or gaining access to new markets. 'Con-solidation is not really helping to reduce costs - you don't need a joint venture to make cost savings. These savings are going to be modest unless companies bite the bullet and close sites.'

Petrofina's historical strategy has been to keep its downstream chemical operations closely linked with its refinery businesses, while keeping a focus on only a few products.

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Little has changed in the company's strategy over the past few years - de Broqueville still believes that the company must concentrate on a limited number of products at few operating sites. An example of this was the company's decision to exit its European PS joint venture with Enichem in 1996.

The exit was not unexpected because of the joint venture's relatively small position in Europe. However, the decision to become a regional US player in PS demonstrates the brave management style of the Belgian group which is not afraid to do things slightly differently.

'We have been very consistent with our strategy, which is to focus on efficiency. We are not big but we are the most efficient in the markets we serve. We are cost-effective, product-flexible and committed to serving our customers. In order to do that we have integrated and concentrated on serving very few markets.' De Broqueville attributes the company's success in this to the high level of integration between the chemicals and downstream sectors. 'We are highly integrated and well located, enabling us to have low costs and flexible facilities.'

Although de Broqueville extols the virtues of closing sites to increase efficiency, it is not an option for Petrofina. European production is located at large, concentrated sites in Feluy and Antwerp. The Antwerp olefins and downstream units are linked to Petrofina's refinery, while the Feluy operations are linked via a pipeline. Similarly in the US, the main production sites are in Carville, Louisiana; Laporte, Pennsylvania; and Bayport, Minnesota. It is these large flexible sites which de Broqueville claims are the key to the company's productivity.

Economic conditions for past few years have made things difficult for the company. Prices in its biggest US business, styrenics, collapsed in the US in mid-1996. By 1997 the propylene margin too was feeling pressure, while hdPE and steamcracker products demand remained high. It was not until early 1998 that styrenics began to recover while ethylene and PE margins started to decline.

But Petrofina's financial results show the company's strategy is working. Since 1990 the company has achieved a 10.6%/year growth in polyolefins, and de Broqueville is confident this can continue. Its 1997 results showed that European operating income was up from 1996 while North American sales were down substantially.

The improved European performance was linked to a boost from monomers where prices rose and margins improved thanks to stable raw materials prices. Polymer prices were also up but did not keep pace with monomer price increases. Petrofina's chemicals production volumes increased 6% for monomers and polymers last year. Strong sales growth and the strength of the dollar boosted European operating income by 45% to BF6.1bn ($175m). However, the sector felt a 40% reduction in US operating income due to pressure on margins brought on by new US capacity in styrene and polystyrenes. The group said chemical profits were up 10% in the first half of 1998.

However, the company's spurning of consolidation or joint ventures in petrochemicals contrasts with the strategy in its paints business. Here Petrofina announced it would join its operation with LaFarge in March, demonstrating that alliances are always an option. The deal reinforced its core paints business of decorative paints where it is number two in Europe.

So far this year there have been different pressures to face. While styrenic margins began to improve, increased imports from Asia and the Middle East are now a factor on the domestic market, but de Broqueville assures that these are having only a small impact on the group. 'There is an increase of exports from the Middle East and Asia, but it is only 25-30% in relative sales. Of total demand in Europe the imports account for only 6%,' he says. 'There has been PE and hdPE coming in from Saudi Arabia, Singapore and South Korea, and a small amount of PP coming from Asia, but it is not really significant.'

Looking to the future, Petrofina intends to focus its commercial efforts on polymers. Despite excess capacity impacting the market, this is viewed as short-term until demand increases. In terms of goals the company wants a 15% return on equity and a 12% return on capital employed.

In refining the company is planning on shifting focus to more added-value products. Three years ago the quantity of product going to chemicals from its Antwerp refinery was only 8%, but de Broqueville says this is planned to increase to 20% by 2001.

Base chemicals in Europe were boosted by a debottlenecking project at Fina Antwerp Olefins last year which improved plant productivity by 6%. Another debottleneck in April increased the ethylene production capacity at the site by an additional 50 000 tonne/year.

In the US capacity of propylene splitter plant at Mont Belvieu near Houston was also expanded. By the end of 1999 capacity there will double with the startup of a third line and the debottlenecking of the two existing lines, bringing the total capacity of the plant to 1.35m tonne/year. Petrofina owns a third interest in the plant, which produces polymer grade propylene.

In the second half of 1997 Petrofina and BASF signed an agreement to build the world's largest liquids steamcracker, adjacent to the Fina Port Arthur refinery. This facility will come onstream in 2000 and will produce some 900 000 tonne/year ethylene and 850 000 tonne/year propylene. This facility is designed to reinforce Petrofina's industrial integration in the US.

As for polymers, Petrofina increased its production of polypropylene by 10% through debottlenecking in 1997. In the US the ninth production line (250 000 tonne/year) in La Porte, Texas, is scheduled to come onstream in the fourth quarter of this year and will bring PP capacity to 1m tonne/year. At the same time the start-up of a polyolefins pilot plant at the Feluy research centre is aimed at accelerating the development of new PE and PP resins using the company's metallocene technology.

Petrofina's policy of continuous cost cutting is apparent in Europe's hdPE plants at Feluy and Antwerp. These, say the company, are benefiting from a long-term cost reduction programme bringing improved processes and product mixes. Debottlenecking at these plants is due to increase production by 10% by the end of 1998. In the US the second hdPE production line is set to come onstream in October. This line will double production to 385 000 tonne/year. But the PP plant announced for Feluy, to come on-line in 1999, has been delayed until the end of 2000. When onstream it will be 380 000 tonne/year, instead of 300 000 as previously announced. In total, Petrofina will spend a total of BF13.7bn on petrochemical investment in 1998 - up 9% from last year.

Fina is still a market leader in PS, but its stake remains US-based after the 1996 sale of its 50% stake in Finamont polystyrene to joint venture partner Enichem. The polystyrene is produced at its Carville, Louisiana, site and is the largest facility of its kind. A fourth production line was started in June 1996 and Fina says it plans to grow its PS business at three times the industry average. Fina's joint venture with General Electric (Cosmar) produces 480 000 tonne/year of styrene.

Petrofina now plans to switch its European emphasis from monomers to polymers. 'In the last five years we put the emphasis on polymer growth in the US. But today we are concentrating on polymers in Europe and monomers in the US.' Expected monomer capacity is estimated to grow from 2.4m tonne in 1998 to 3.0m tonne in 2001. Polymer production too will keep pace, up from 2.8m tonne this year to 3.5m tonne in 2001.

On the issue of Petrofina as a global player, de Broqueville says the company considers each product individually. 'We serve a global market from Houston and Antwerp. Production-wise we serve the Atlantic basis well, but we also serve Asia from there, too.' De Broqueville claims to do this as efficiently as from an Asian base, but admits that transportation is slower. He also confirmed that the company was looking at developing 'strongholds' outside of the Atlantic region. 'What is driving us globally is the fact that our customers want it.'

PETROFINA POLYMER CAPACITY

1998

2000

Europe

Feluy PP

420 000

800 000

Feluy+Antwerp hdPE

500 000

600 000

Laporte PP

1.0m

(including new 250 000 tonne/year line)

Bayport hdPE

385 000

(including new 200 000 tonne/year line)

Carville PS

465 000

Comar Styrene

480 000

GLOBAL PRODUCTION IN TONNE

1992

1998

2001

Monomer

1.7m

2.4m

3.0m

Polymer

1.6m

2.8m

3.5m

OPERATING INCOME, BFBN

1997

1996

1995

Chemicals

Europe

6.1

4.2

10.4

4.4

7.2

8.6

Paints

1.6

1.2

0.9

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