AECI: Radical restucturing puts focus on core strengths

23 August 2001 18:09  [Source: ICIS news]

All companies have to be wary of the hyperbole surrounding the words ‘speciality’ and ‘global’ not least small to medium-sized players.

Geographically isolated producers, particularly, have more to lose than most by becoming ensnared by easy slogans and industry trends. If they don’t tread carefully they can do themselves a great deal of harm.

The Australian chemicals producer, Orica - in the news this week because it has just appointed a new chief executive officer - is a case in point. Strategically, Orica may not have been wrong to pursue a global strategy in explosives – although many in Australia think it was – and to seek joint ventures in plastics. However, tactically it clearly made some wrong decisions. The result has been a boardroom battle, the loss of a chief executive and a drop of more than 50% in the value of the company.

In South Africa recently I saw a different company, operating in somewhat similar circumstances which seems to be doing things right. AECI has changed a lot in a few years. Since declaring towards the end of 1998 that it was going to make a clear change in direction the company has sold 17 businesses and closed six manufacturing plants to focus on explosives, some highly specialised nylon and polyester products and a group of domestic, that is largely South African, niche businesses.

Chief executive Lex van Vught tells me he was once wedded to the specialities idea but he has changed his mind. AECI has become a broadly based specialities company but speciality chemicals are not the be all and end all in management’s view of the world. AECI has one business that is going global – the SANS fibres operation – but the other two segments of the company are distinctly domestic and regional. Chemical Services is the cluster of AECI speciality chemical businesses which are dependent not so much on the products they make but more in the way those products are sold. The businesses rely totally on customer focus and their customer service capabilities.

The point is that AECI has not been hoodwinked by strategic trends common in the chemical industry to do more than it could. The company has focused resources and skills on what it knows and does best and in the process built a great deal of service – what could also be called specialisation – into its operations.

Back in 1998 it was clear that in many business areas ACI had no feedstock advantage or effective critical mass. The businesses divested have included the 40% stake in plastics producer Polifin to Sasol, the 50% share in Alliance Peroxide to the then Degussa Huls, the sale of the acrylics business to Ineos Acrylics and the 50% stake in a fertiliser joint venture to Sasol. Interest in technical coatings, automotive trim components and gold mining have also been sold. The sale in January 2001 of its 50% stake in Kynoch Fertilisers to partner Norsk Hydro marked the complete withdrawal from retail fertilisers. AECI still has a group of non-core activities including a Dulux paints business and a bioproducts company. These have generated some interest but have yet to find buyers.

The focus has shifted towards more specialised areas but largely towards businesses in which management can see that AECI has or can build a clear competitive advantage. The financial results reflect the current business mix, the relative robustness of the speciality areas offset largely by the commodity end in explosives and in some of the remaining joint ventures but there is also a clear legacy effect as exceptional charges relating to the repositioning are booked.

Van Vught says that the company is developing a much more technically specialised explosives solutions business linking explosives hardware with computerised detonation systems. The resulting product slate is sold across Africa and inroads are being made into markets in South America. The SANS fibres business stands out in that it is becoming more of a global operation. AECI is focusing on becoming a leading producer and supplier of nylon and polyester industrial yarns. The strategy centres on light decitex industrial yarn, used in the manufacture of sewing threads, parachutes and timing belts, and heavy decitex industrial yarns used in conveyor belts, tarpaulins and boat coverings. There is a successful joint venture in the US and the company has added business acquired from Solutia. There are further opportunities in the niches AECI has chosen to acquire business from the major global fibre producers.

AECI is in a stronger position now than it was a few years ago with businesses much more closely aligned to true value creation rather than the pursuit of unattainable goals. The company has achieved autonomy from its majority shareholder, Anglo American, in a share purchase deal concluded in January. That gives employees much more incentive to make the new company structure work and drive for stronger value creation from the assets currently held.

Cost control is vitally important in the current operating environment but Van Vught sees some quite strong growth from the business portfolio. He expects sales and earnings in the SANS Fibres operation to grow at 7% a year in real terms, mainly through international expansion (inflation in South Africa is currently running at about 7% a year). The explosives business will benefit from growth in countries such as Nigeria and Mali as well as the inroads AECI wants to make in South America. Chemserve has to be a highly dynamic operation which focuses on its niche marketing skills. Van Vught foresees growth through small bolt on acquisitions here as well as further rationalisation of the existing portfolio.

By: Nigel Davis
+44 20 8652 3214

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