21 April 2003 00:00 [Source: ACN]
president and ceo
A good friend of Asian Chemical News, when he was told about the content of this interview, suggested that its title should be 'what's on Peter's mind' - which I dismissed immediately as being far too folksy.
But 'when in Rome', as they say, or to be more accurate 'when recently in Rome' (I've just returned from the US)... so let's stick to the title, the short explanation of which is a great deal. The long answer to what's on Peter's mind now follows.
The Peter we are talking about is the one who is president and chief executive officer (ceo) of the world's largest privately owned chemical company, Huntsman.
It's obvious, therefore, that a great deal that's occupying Peter Huntsman relates specifically to his company.
But a great deal of his concerns also relate to a US chemicals industry in general that's been battered by high natural-gas prices (maybe distorted by fraud), the current sluggish economy that shows signs of falling into a double-dip recession, and the volume of litigation that is draining the financial performances, share prices and energy of so many companies.
But let's start with first things first as far as Huntsman itself is concerned.
The next 18-24 months are going to be crucial for a company that was facing having to file for Chapter 11 protection against bankruptcy before it was rescued in June 2001 by Mattlin Patterson Global Opportunities Partners (MGOP). The venture-capital company had acquired US$700m of Huntsman Corp and Huntsman Polymer bonds, which it then swopped for an equity position in Huntsman. The Huntsman family retained operational and board control.
Things now seem to be looking up for Huntsman, and so Peter Huntsman is talking about the possibility of an initial public offering (IPO) in about 18 months. Perhaps to pave the way, he peppers a great deal of his remarks with the phrase 'shareholder value'.
But also a possibility within the next 18 months is a sale by the shareholders of the entire business to new owners, although Peter Huntsman says that, 'at current asset values, this wouldn't make sense'.
A third option is the involvement by Huntsman in a merger or a reverse takeover, one of the reasons for which would be the general malaise of the US industry.
Peter Huntsman points out that a symptom of this malaise is the collapse of market capitalisation to as low as US$100m for some companies.
On litigation, one of the causes of the current crisis in the industry, he says some US chemical companies are spending so much time managing lawsuits and the fallout from lawsuits that they have little time for anything else.
The result is that there is hardly anything for chemical analysts to write about other than the bad news, given that the companies are being forced to devote so much of their time to defensive management rather than to the type of measures that would grow their businesses.
The end product is what Peter Huntsman characterises as a 'death spiral' of ever-declining share prices.
Take Solutia as an example. The speciality-chemicals major is facing a barrage of court cases concerning polychlorinated biphenyl (PCB) contamination allegations. The litigation stems from claims of PCB contamination at the company's former Monsanto production site in Anniston, Alabama, US.
For the year ended 31 December 2002, Solutia recorded a net loss of US$151m, due largely to legal fees.
And its share price has been mauled by the PCB crisis. As ACN went to press, Solutia's share price was trading at US$1.25 against more than US$8.00 12 months ago.
But one could have chosen any one of many chemical companies in the US that have been damaged by a culture of reaching for the yellow pages and the lawyers' listings if you have so much as stubbed your toe on a kerbstone.
One can imagine, therefore, the level of risk to companies from the much more financially attractive option that you might, just might, have been exposed to chemicals and at some point in the future could become sick.
You don't have to imagine. If you prefer, you can look at the statistics.
In the case of asbestos, for instance, only 5% of what's been paid out to date is to those who are suffering from mesotheleoma - the disease caused by exposure to asbestos. The remainder of the US$35bn that's been paid out has gone to those who theoretically might become sick in the future and, yes you've guessed it, to those nice lawyers. The lawyers are earning 47 cents on every dollar handed out in asbestos compensation.
Share prices have fallen to such an extent that analysts had stopped tracking many chemical companies, he says. Because they are no longer tracked, they have no chance of attracting the attention of fund managers who have, say, 10% of their total portfolios devoted to pharmaceuticals and chemicals. The end-result is that it's only the likes of Rohm and Haas, BASF and Dow Chemical that get the investment they need for growth.
Another more recent reason for the clobbering of equity values is the run-up in natural-gas prices that saw spot prices spiking to US$30/mmbtu in February, resulting in March contracts of US$9/mmbtu.
Two of the causes of the second severe spike in natural-gas prices in the last three years are a structural shortage and rising demand from power generators for environmental and other reasons.
Peter Huntsman and other senior executives agree that gas prices will level out at US$4-5/mmbtu because of these long-term problems. However, this would still be 1.5-2 times more than prices that have prevailed over the last few years.
Both Peter and his father Jon Huntsman fulminate against the third very probable cause of the recent feedstock-cost spike - speculation.
On one leading US gas index that we shall not name, in case we win the attention of those nice lawyers, Peter Huntsman says that, in the last three days in February, gas prices surged to as high as US$30/mmbtu.
He indicates that more than just a coincidence might be at play here, as it's an average of the last three days of spot gas prices on the exchange that determine the contract prices for that month for all industrial users. Only seven players were active on this particular index, creating a strong potential for manipulation, he says.
Every US$1/mmbtu rise in gas prices costs Huntsman US$35m/year on an equivalent basis, adds the ceo.
His father's words were even stronger. Speaking on the sidelines of last month's 28th International Petrochemical Conference (IPC) in San Antonio, Texas, he said that, immediately after he first claimed that mani-pulation had caused the gas-price spike, 'prices came down as demand wasn't strong enough to justify the increases. I was 100% right'.
The Huntsmans are pressing Congress for an investigation.
'I would,' Jon Huntsman added, 'expect an investigation to lead to findings of fraudulent behaviour and lead to a change to the system of overseeing natural-gas pricing. It is our hope that out of this will come a methodology to establish prices for natural gas without exploiting the customer.'
If the strength of their words and feelings are anything to go by, you wouldn't bet against them succeeding. Whether they will succeed entirely in adopting the right strategy for a company that's been criticised for over-stretching itself financially, is viewed by some as a slightly riskier bet.
But again, if words are anything to go by, Peter Huntsman sounds pretty convincing when it comes to prudent, cautious expansion. Despite Huntsman's financial problems, his ambition has not been dented.
'I think, at an appropriate price, anything is available. Assets in and outside South Korea are available,' he says.
The ceo mentions Thailand as another country where Huntsman might be involved in talks, although he stresses: 'Yes, discussions are taking place, but there is nothing imminent.'
Peter Huntsman repeats his comments of last October (ACN 21 Oct, p9) that Huntsman remains interested in acquiring an integrated olefins facility in Asia. However, he adds on this occasion that 'we will buy anything [integrated or non-integrated], as long as it makes money'.
He then qualifies this comment by saying that Huntsman is no longer interested in the vinyls chain. The ceo had told ACN in 2001 (ACN 19 Feb, p5) that a vinyls chain acquisition was a target, but now says this has been ruled out because of the potential for litigation.
And so what Asian assets is Huntsman interested in? He offers no specifics, but clarifies what it was never interested in - Hyundai Petrochemical.
Huntsman's name had been frequently mentioned, along with those of Koch Industries and the LG Chem/Honam Petro-chemical consortium, as a contender for the debt-distressed Hyundai.
Peter Huntsman admits that, when earlier asked about any interest in Hyundai, he 'probably unwisely' declined to comment, fuelling the speculation that his company had made a bid.
Now that you take Hyundai out of the equation following its likely acquisition by LG Chem/Honam and the prospective joint venture between Samsung General Chemi-cals and Atofina, what else is there left in South Korea that's worth buying?
There's SK Corp in Ulsan that's looking at a merger, a joint venture or perhaps even a sale of its assets.
Daelim Industrial at Yeochun has made no secret of its objective to minimise its exposure to petrochemicals with its first target a merger of its wholly owned hdPE operations with PolyMirae, the PP joint venture between Daelim and Basell.
The rest of what is available appears to be non-worldscale and therefore not worth pursuing.
'There are some assets that are available that might not be transparent,' he says, talking in general about Asia. Again, he would not be drawn any further.
What is more fertile ground is his strong enthusiasm for the corporate and macroeconomic reforms that have taken place in Asia since the pre-1997 'spending binge' funded by too many easy loans and huge and unwise-after-the-event capacity additions.
'Companies are much more shareholder-focused,' he says, again perhaps with an eye on that IPO.
He makes an interesting point that, because of rising standards of living and therefore incomes in the more developed economies of Asia, chemical companies in these countries can no longer fall back on cost competitiveness to give them an edge. The result has been 'more disciplined management and the use of SAP', hence the attractiveness of some assets.
But he adds that the overhang of the Asian financial crisis means that further chemical asset sales would have to occur as chaebol attempt to straighten out their financial books.
To get back to the greater prudence and caution, he says that any Asian asset buy would involve a financial partner taking management control.
MGOP is the obvious leading contender to be a partner. Huntsman, if it does buy an Asian cracker complex, or anything else for that matter, plans at this point to take only a minority share of 30% and to assume only operational control.
But perhaps before any buy occurs, Huntsman has some unfinished business to complete - the purchase of ICI's 30% stake in Huntsman International for US$300m. ICI was left with the equity holding after Huntsman purchased the UK major's poly-urethane (PU), titanium dioxide (TiO2) and selected aromatics and olefins businesses in April 1999.
The ICI purchase is due to be completed in the next 2-3 years.
Also unfinished is the merger of Vantico with Huntsman's PU business. MGOP also rescued Vantico, the Swiss performance polymers player, through a debt-for-equity swop in January of this year. MGOP will transfer its equity in Vantico to the Huntsman group of companies.
Peter Huntsman says there are synergies between Vantico and Huntsman, in that they share customers and supply complementary applications, particularly in adhesives and sealants.
But although Huntsman may be in no desperate hurry to acquire assets, it is further down in the road towards an ldPE project at the Wilton cracker complex in Teeside, UK, which it acquired as part of the ICI deal.
Huntsman intends to construct a 375-400 000 tonne/year facility, which would be the largest in the world.
The logic is that, at present, Huntsman has to ship ethylene overseas from Wilton with the UK in PE deficit. The freight-cost savings alone would be US$29m/year, never mind the added value of producing PE.
The plant, which would cost around US$200m, is due to start up in Q1 2006, with a technology supplier to be selected by end-April.
At one stage, Huntsman considered getting somebody else to build the plant on its behalf. However, it has since decided to construct the facility on its own through licensing technology from one of the three suppliers - Stamicarbon, BASF and Polimeri Europa.
Also on the projects radar stream, though less immediate than Wilton, is a further addition to TiO2 capacity.
The company's facility at Teluk Kalung, Terengganu, Malaysia, has already been expanded to 56 000 tonne/year from 50 000 tonne/year, with the potential for a new grassroots plant at the site. This would result in a doubling of total capacity. More immediately, the Teluk Kalung plant could be debottlenecked by a further 10%.
Huntsman has also for several years talked about a greenfield project in China, with 50 000 tonne/year due to be brought onstream in 2006 and a second plant of the same size at later date.
Again last October, Peter Huntsman told ACN that Huntsman would build a plant in China only as part of a consortium. Now he says the options are to either build in China or to replicate the plant in Malaysia.
But reinvestment economics for TiO2 currently don't add up.
Peter Huntsman says prices are at US$1800-1900/tonne cfr Asia after a successful price hike in Q1, with hopes for further increases in Q2 and Q3. He adds that prices would have to be at US$2200-2300/ tonne cfr Asia to justify brownfield investment and US$2600/tonne cfr Asia for a greenfield plant.
Also on the projects front, Huntsman expects to make a decision within a year on whether or not to build a speciality amines facility in Asia. A study has just been launched.
In the US, Huntsman is the biggest speciality amines player with its product range including ethyleneamines, which it acquired from Dow Chemical in 2001, and polyether amines. Its capacity in the US totals 600m lb/year.
A plant in Asia would have a capacity of 80-100m lb/year at an investment cost of around US$70m.
Something else that's on Peter's mind is price protection. Just about every US producer one talked to at last month's International Petrochemical Conference went on about the need to remove the time lag between feedstock cost increases and price increase for customers.
'At Huntsman, a six-month delay in price increases needs the approval of a vice-president or president,' says Peter Huntsman.
Maybe, in no particular order then, this is all of what the ceo is eager to talk about.
Finally, a word of thanks to the good friend who gave us a way into this article. As any trustworthy lawyer would say, 'your cheque is in the post'.
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