Newly-signed BP polymers deal is landmark for Solvay

14 August 2001 16:08  [Source: ICIS news]

Reports on the BP polyethylene (PE)/polypropylene (PP) deal with Solvay have tended to focus on the implications for the oil major’s chemicals company. But for Solvay the outwardly complex exchange of commodity and speciality assets is significant.

Belgium-headquartered Solvay is rapidly becoming a group focused on specialised chemicals and on pharmaceuticals. Management has struck some good deals recently for the remaining bulk chemicals and polymer businesses but the agreement with BP is a great leap forward for the company’s strategic repositioning and certainly a cornerstone of the current development phase.

Primarily, it reduces exposure to petrochemical cyclicality and focuses the business further on higher margin and higher growth speciality polymers. According to chief executive Alois Michielson, the just signed agreement will ensure that 85% of Solvay’s sales come from markets where it holds a position among the top three global producers. Closure is expected in September after approval from the European competition authorities.

The details revealed last week show a cash payment from BP of Euro80m ($72m) for Solvay’s divestment of its PP business, where it is number 12 worldwide with sales of Euro500m, the Belgian company’s acquisition of BP’s engineering polymers business and the creation of two Solvay/BP high density polyethylene (hdPE) joint ventures with a total turnover of about Euro2bn.

From Solvay’s standpoint, the engineering polymers acquisition - which includes leading Sulfone Polymers and Amodel (polyvinylidene fluoride (PVDF) polymers) businesses - lifts speciality polymer sales by 50%. The engineering polymers’ turnover, in a fast-growing market, will rise to about Euro900m to represent 33% of plastics segment sales. Growth of close to 10% a year is being sought. The hdPE arrangements in the US and Europe add to a growing list of Solvay joint ventures through which the company has sought to overcome its fundamentally uncompetitive lack of polymer feedstock integration. Solvay set up two hdPE joint ventures in 1999, its first steps down the joint venture route for the business.

The strategy in plastics has been to focus on higher margin specialties and seek joint venture solutions elsewhere and after this transaction the high performance engineering polymers will account for a greater proportion of the plastics segment (in which vinyls account for about 40%). Solvay’s plastics segment sales in 2000 were 14% higher at Euro3.0bn and earnings before interest and tax (EBIT) Euro230m, up 15%. The figures, however, do not include the PP results already deconsolidated and accounted for by the equity method following the announcement of the agreement with BP. The PP operations lost money in 1999 and in 2000, the Euro38m reported loss being made on sales worth Euro530m. It is hardly surprising that Solvay has also had a hard time of it in PE, particularly in the US.

Solvay says that it is counting on rapid growth now in the high performance speciality polymers businesses. The transfer from BP should lift speciality polymer sales to Euro700m. The move will give it 11 sites in Europe and North America and a large sales force in these two regions plus Southeast Asia and Japan. The polymers include, among others, PVDF fluorinated polymers, polyvinylidene dichloride (PVDC) type barrier materials, polysulfones, polyamides and liquid crystal polymers.

The new hdPE venture will have sales of some Euro2bn and a total capacity of 2.2m tonne/year. This will take it into joint second position in world hdPE capacity with Dow Chemical (including Union Carbide) and Chevron Phillips. ExxonMobil remains world leader. The global outlook for hdPE, the biggest polyethylene (44% of the global PE market in 2000) is not bright but overcapacity is likely to be absorbed after 2002 with an upturn forecast for 2003-04. Forecast growth rates are as high as 4.6% a year, the equivalent of one new worldscale plant a year.

By: Nigel Davis
+44 20 8652 3214

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