Synergy potential key to chems performance at TotalFinaElf

06 September 2001 16:49  [Source: ICIS news]

The TotalFinaElf half year figures show that chemicals is still (just) contributing to group cashflow.

What are in effect three separate chemicals businesses have collectively done reasonably well in the face of a tough operating environment and the US downturn. But it is hardly surprising to hear that the company is prepared to cut back further, although perhaps not too far in terms of capital expenditure. Fixed costs in petrochemicals and plastics can be driven down by 20% (between 2000 and 2003) the company says. Part of that saving can come from further investment.

There is still talk of how things might have been had the earlier Elf Aquitaine grand plan for chemicals become reality but there is little point now of talking about spinning off chemicals. TotalFinaElf chief executive Francois Cornelis has let it be known that splitting chemicals from the oil group is firmly off the agenda. The company continues to drive for a sharper profile in the three operating divisions, petrochemicals and plastics, intermediates and performance polymers, and specialities.

TotalFinaElf still has a diverse range of chemicals assets and it certainly needs to shed more businesses as well as drive stronger performance from the remaining assets. Management recognises that fact and has confirmed that it intends to sell a total of Euro1.5bn ($1.36bn) of assets between 2000 and 2003. Earlier return on capital employed targets look to be too ambitious now but it is the ways in which the company drives down costs that will determine how strongly it performs when markets turn up again.

One thing is certain, TotalFinaElf will not be pushed into hasty decisions. It has looked closely at the synergies that exist between its refining and chemicals businesses – the Total legacy – and the ways it can meld that with the somewhat different former Elf Aquitaine approach. The TotalFinaElf message to investors is that it will optimise performance in chemicals with its fixed cost reduction programme and further portfolio management.

TotalFina Elf was hit hardest in petrochemicals and plastics in the first half, with operating profits dropping to Euro70m from Euro330m in the first half of 2000. Profits rose by 4% to Euro28m in the intermediates and performance polymers division but were down 12% at Euro29m in specialities.

The company is keeping a close watch on capital employed in petrochemicals and limiting it to 9% of group capital. The strong links with refining, on the other hand, suggest that investments when they come will have more to do with integration and the synergies that can be built into the business than anything else. Petrochemical investments, TotalFinaElf says, will be concentrated on large-scale existing sites leading to lower unit costs.

The intermediates performance is all about the market position the company holds in key areas of engineering polymers, fluorochemicals, peroxides and acrylics. Fluorochemicals and peroxides volumes were higher in growth markets like China in the first half. Acrylics benefited from lower raw material costs over the period and product innovation certainly helped growth of the company’s engineering polymers.

TotalFinaElf includes paints and adhesives in the specialities division and says that it is beginning to see the impact of synergies between the different parts of these two businesses. Recent acquisitions of resins from Croda, of an adhesives business, and in electroplating, have helped provide economies of scale in their respective markets.

By the end of June chemicals businesses with total revenues of about Euro600m had been either been sold or the sale agreed, a jump from under Euro400m at the end of 2000. The company’s Euro1.5bn target is still some way off. The group has a Euro12bn 2000-3 divestment programme target. It expects the corporate ‘self-help’ programmes to contribute at least Euro2.6bn to operating income by the end of 2003.

In chemicals a lot depends on how much more synergy potential there is from combining the adhesives and coatings businesses and putting together the petrochemicals and plastics operations. This is an important year in chemicals at TotalFinaElf and one in which many of the merger synergies are expected to be realised. The company is also due to make considerable savings from a re-engineered procurement or purchasing programme.

By: Nigel Davis
+44 20 8652 3214

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