BASF Is Ready to Harvest Profits From Large Chemical Investments

20 January 2003 00:00  [Source: ICB Americas]

After a period of major capital investments in the Nafta region, BASF is shifting gears. The company is trimming capital outlays from peak levels in the area, while optimizing manufacturing platforms and streamlining its business portfolios. To counteract the effects of a business decline in 2001, BASF has in place a strong strategic framework to enhance profitability.

The approach is showing results. Although margins remained under pressure, 2002 earnings in the Nafta region were considerably higher than in the previous year, despite ongoing challenges in the economy, according to Jrgen Strube, chairman of the board and CEO of BASF AG. Presenting the company's third quarter results last November, Mr. Strube highlighted consumer confidence as the crucial factor that will determine further growth in the region.

At the same time, Mount Olive, N.J.-based BASF Corp. plans to reduce major capital outlays. After spending roughly $4 billion in the Nafta region from 1997 to 2002, BASF Corp. will reduce that number to less than $400 million per year.

BASF Corp. is an affiliate of the Ludwigshafen, Germany-headquartered BASF Group, which is organized into five business groups: Chemicals, Plastics & Fibers, Performance Products, Ag Products and Nutrition, and Oil & Gas. All business segments except Oil and Gas are represented in the Nafta region, which contributed about $7 billion of the Group's 2001 sales of $29 billion.

The Chemicals sector has enjoyed a major portion of recent company capital investment in the Nafta region. The crown jewel during the company's heavy-duty investment phase was the construction of its $1 billion steam cracker, in collaboration with AtoFina Petrochemicals at Port Arthur, Tex. The 60/40 (BASF/AtoFina) joint venture, operated by BASF, began production late last year with an initial capacity of 920,000 tons of ethylene and 550,000 tons or propylene. A metathesis project is on track for completion later this year. It will use butenes from another BASF joint venture called Sabina to increase propylene yield to 860,000 tons while cutting the cracker's ethylene output to 830,000 tons.

Shell (60 percent), BASF (24 percent) and AtoFina (16 percent) are partners in the Sabina joint venture. Located adjacent to the BASF/AtoFina steam cracker in Port Arthur, it will produce 400,000 tons of butadiene, 300,000 tons of branched alkylate and roughly 400,000 of purified butenes, to be consumed primarily in the BASF/AtoFina metathesis unit. These facilities, to be operated by BASF, will also start up in late 2003.

Crude C4 feedstocks will be supplied from the Port Arthur cracker and from Shell's Deer Park facility.

"As far as the Nafta region is concerned," says Carl Jennings, president of BASF Nafta I region, "once the Sabina C4 project is off and running, BASF will then focus on Dr. Strube's imperative, 'making the investments sweat,' meaning that Nafta business strategy will primarily focus on portfolio and efficiency improvements as well as higher capacity utilization to gain maximum benefit from existing investments."

The strategy is showing signs of success. 2002 showed real improvement over 2001, notes Mr. Jennings. "After a very challenging 2001, we are on track to return to profitability in 2002. We've put the framework in place and the start-up costs are behind us," he says. Prices, however, still remain a concern, he adds.

Chemicals reported a 21 percent gain in worldwide sales for the third quarter of 2002. The new Port Arthur steam cracker is identified as the major contributor for the increase in volumes.

The plasticizers business, usually an early economic trend indicator, im-proved during 2002, while oxo alcohol margins are still under pressure. For the coming year, the company will focus its efforts on re-establishing price/margin leadership, says Mr. Jennings. "We need olefins cash margins of 9 to 10 cents per pound, and we're not getting that on average right now. We expect this to improve during 2003/2004, but the Iraq issue remains the wild card."

BASF is changing strategy in the area of EO/EG (ethylene oxide/ethylene glycol) and will primarily pursue purified EO. Last July, it announced permanent closure of two older EO units at its Geismar, La., complex, which had a capacity of 270,000 metric tons. At the same time, the company announced closure of its 390,000 metric ton glycol unit. BASF will continue to operate its newest EO unit at the site and will increase capacity of purified product there to 220,000 metric tons for downstream internal requirements and merchant sales.

Intermediates and inorganics are also part of BASF's North American chemicals business segment, and Wayne Hill, group vice president for BASF Corp.'s Intermedi-ates and Inorganics, reports that 2002 showed very nice sales volume increases throughout the year. Sales in intermediates and inorganics rose by 7.5 percent during the third quarter of 2002, compared to 2001. Prices, on the other hand, still remain under pressure, Mr. Hill concedes.

Roughly 54 percent of intermediates and inorganics sales consist of diols, produced at the Geismar, La., and Freeport, Tex., sites. Amines, also manufactured at Geismar, claim about 18 percent. Among its specialties products, the business also offers catalysts and electronic chemicals.

In 2001, BASF successfully started up its $100 million, 25,000 ton-per-year 1,6 hexanediol (HDO) plant at Freeport, Tex. In 2002, the company followed up at the same site with a 60,000 ton-per-year plant for neopentyl glycol (NPG), which is marketed as Neol and used as precursor resin for powder coatings.

The business group has launched several far-reaching cost cutting processes. They include setting up minimum order sizes for certain products while streamlining the portfolio to eliminate the clutter of smaller products, Mr. Hill notes.

BASF Corp.'s Performance Chemicals business experienced significant restructuring during the last few years. This sector, with sales in the range of $650 million, consists of the former colorants business, which was merged with the specialty chemicals group (surfactants, chelates, biocides, printing systems, leather and textile chemicals, and fuel additives). In November of 1999, the company merged its textile dyes operations into DyStar, the 50/50 joint venture between Bayer and Hoechst. DyStar is now owned equally by the three partners and claims about $1.1 billion in sales, corresponding to more than 20 percent of the global dyes market. About 50 percent of the performance chemicals portfolio is targeted at the detergents industry, while 20 percent serves the coatings, plastics and specialties industries.

Many of these markets suffer from severe pricing pressure, overcapacity or Asian competition, notes Michael Stumpp, group vice president for Performance Chemicals, North America. The US textile and leather sectors are under strong competitive pressure from Asia, Mr. Stumpp says. Citing difficult market conditions, BASF announced in March of last year that it would discontinue production of textile and leather chemicals at its Charlotte, Chesapeake Drive, production facility in North Carolina by the end of 2002. Several products will be moved to other production locations.

The company says that it has set the stage for above GDP growth for the sector. Specifically, it will boost its market presence in the areas of surfactants, chelates, biocides and printing systems. Biocides sales were doubled during the last year, Mr. Stumpp notes. Plans also include increased focus in the automotive leather area.

Additional moves to increase competitive strength in Performance Chemicals involve the setting up of strategic alliances with top BASF customers and increasing global research and development spending by roughly 10 percent.

Driven by the need to roll out new products, the performance sector has introduced a slew of innovative portfolio additions. "We are beginning to harvest the fruits of our efforts," Mr. Stumpp says. On the list are new surfactants designed to reduce foaming, a new Variocrom effect pigment with automotive and high value consumer product applications, X-Fast quick-stir-in pigments, a chrome-free leather tanning system, solvent-free leather finishing system and chelates for soil remediation, for which Mr. Stumpp has especially high hopes for growth.

BASF participation in the superabsorbent polymers (SAP) market is relatively new. Primarily used in diapers, superabsorbents are partially cross-linked polyacrylates that can absorb about 25 percent of their weight in water. Fortified by existing acrylic acid capabilities and attracted by a projected growth rate of 8 percent annually for the product, BASF decided to enter the world stage for SAPs roughly five years ago, with the acquisition of Clariant's superabsorbent business. The move netted a 95,000 metric ton-per-year production site at Portsmouth, Va., while a smaller Frankfurt/Main, Germany, plant entered a toll manufacturing arrange-ment with BASF.

In November of 1999, BASF continued its aggressive global SAP strategy by purchasing Chemdal International, a subsidiary of Amcol International Corp., for close to $660 million. The move netted superabsorbent production on three continents-Europe, the US and Asia. At the time, it almost doubled BASF's SAP capacity to roughly 240,000 tons per year.

The company gained production sites in the US in Aberdeen, Miss. To serve Aberdeen's feedstock needs, BASF boosted acrylic acid output at Freeport, Tex., from 300,000 to 360,000 metric tons per year. Currently BASF claims about 39 percent of the North American superabsorbents business, with Stockhausen and Dow being its main competitors.

In 2001, the world market for superabsorbents was estimated at roughly  1.6 billion. Europe and North America each claim about 35 percent of the total, and the growth areas of Asia and South America consume about 12 percent each.

BASF has made market share a priority in addition to reducing manufacturing and logistics costs. Process improvement efforts have been launched at the company's production sites at Aberdeen and Portsmouth.

BASF is back integrated into acrylic monomers, acrylic acid and acrylic esters, the major feedstocks for superabsorbent polymers. Acrylics also represent about 42 percent of the company's functional polymers business group.

In addition, about 23 percent of functional polymers are paper chemicals, which include coating binders, colorants and process chemicals. The remaining 35 percent of the business area includes polymers, with specific applications in construction, architectural coatings, adhesives, carpets and fiber bonding.

Overall, the Functional Polymers business area is challenged by market consolidation in key customer areas and increasing raw material costs, according to BASF. In response, the company has reorganized its paper business, established global key account teams and introduced new product technologies in certain markets. Fixed costs have been reduced 18 percent from 2000 levels, and two manufacturing plants were closed.

Above all, the Functional Polymers business has been pushing for product innovation. Among the entries unveiled have been architectural coating lattices, which allow the production of low- or zero-VOC house paints, and asphalt additives and treatments, designed to increase road life. The sector also rolled out high strength paper coating binders and formaldehyde-free adhesives for the replacement of phenol-formaldehyde resins.

In summary, the BASF Chemical businesses in the Nafta region are ready to harvest the fruits of their last investment phase, says Mr. Jennings. "With our major acquisitions and large plant investments behind us, the BASF Chemicals businesses in North America are positioned well for sales growth and sustained profitability."

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