BP Chemicals relishes prospects for its new-look portfolio

14 February 2001 17:55  [Source: ICIS news]

BP Chemicals admits that it will have to work hard over the next 12 months 'bedding down' its new businesses and joint ventures. Recent strategic moves will change the company a great deal and, as experience with Amoco and Arco has shown, it can't afford to lose focus in the consolidation process.

As part of the re-positioning in chemicals, BP will take over Bayer's 50% interest in Erdolchemie in the second quarter in a move which opens up a host of new opportunities in Germany and central Europe. The polyolefins deal with Solvay (in which the two companies create high density polyethylene (hdPE) joint ventures in Europe and the US, BP's engineering polymers business goes to Solvay and Solvay's polypropylene (PP) assets transfer to BP) means that BP can consolidate its European polymer operations and expand polyethylene (PE) horizons in the US. It lifts the company to the number two position in the global PP business, number three in PE overall and number two in hdPE. Add Erdolchemie to recent capacity expansions at Grangemouth in the UK and BP Chemicals rises to fifth position in global olefins.

At the same time, the company is taking over the Appryl PP joint venture with Atofina and looking to sell its downstream plastics fabrication and fabrics and fibres businesses. These moves combined will mean that BP swaps about a half of its current workforce. The organisational problems are clearly coupled with undeniable strategic opportunities.

In operational terms, the chemicals businesses are critically dependent on feedstock prices and rates of economic growth now, but BP is looking beyond 2001 and into 2002/3 when the new business opportunities that will arise from this rush of activity will be more clear.

Chemicals at BP produced a replacement cost operating profit last year of $1.036bn on a turnover of close to $11.2bn. Sales were up 20% and profits up 11%. The second half difficulties pushed real returns down and close to a return on capital employed of something like 8%. BP Chemicals would expect to return closer to 15% in 'middle of the cycle' conditions. The businesses are certainly not close to that now as high oil and gas prices and new capacity in the Middle East and North America make life very difficult down the olefins chain.

BP Chemicals chief executive, Byron Grote, is expecting volume growth of 20% in 2001 coming from capacity expansions and acquisitions. A further 20% volume increase can be expected out to 2003, he says. BP drove unit cash costs per tonne of product down 16% between 1998 and 2000 and looks for an aggressive 8% reduction in costs to 2003. About half of these reductions will come from the portfolio re-alignment while half are derived from better process control, the on-going focus on conversion cost efficiencies and much higher procurement savings.

BP Chemicals can't manage costs in a foolish way in this tough business environment, Grote says, simply because of its growth ambitions but his determination to see costs come down further is clear.

BP's capital expenditure will run at about $1.3bn a year between 2001 and 2003 on projects largely already planned. Looking further ahead, BP is somewhat light in olefins and is looking into the opportunities of using deep sea gas from the Gulf of Mexico in the US. It is not too keen on cracker expansions in Europe. Grote says that the company is looking at a number of ideas for cracker complexes around the globe.

It is, however, more a question now of consolidation and of BP Chemicals seeing what it has got. The acquired assets provide opportunities for greater integration and for cost savings. They also change the nature of BP Chemicals business, for instance in Germany and in the US.

It is a truism in petrochemicals that whatever you do you need to be good at it and the strategic thrust at BP is that the company needs to focus in chemicals upstream and closer to the cracker. The opportunities will be created by controlled, cost effective expansion, driven to a great extent by technological and certainly feedstock advantage.

All the chemical offshoots of the big oil companies have to grow and succeed on limited resources. And they have to operate in a world of petrochemical giants. The acquisitions, investments and divestments at BP, planned and already made, show that the company should benchmark itself against a narrower set of companies. BP says its peer group is now much more clearly the likes of Shell, Exxon Mobil, BASF and Dow/Union Carbide.

By: Nigel Davis
+44 20 8652 3214

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly