INSIGHT: Grasping opportunities while you can

11 July 2007 16:55  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Keeping a foot on the gas, Europe’s mid-sized chemical players have a great deal still to do in 2007.

The window of opportunity for the newer companies like Arkema and Lanxess is likely to be brief. Industry economists are predicting a growth slowdown; feedstock and energy costs are rising on the back of higher-priced oil.

Given strong downstream demand growth for these players in Europe, North America and particularly in Asia, profits can be pushed along.

The question, however, is how much can be achieved in the period before the next downturn, and how robust the firms’ businesses are when that downturn comes?

Analysts expect the downturn to have an impact on as much as 40% of Arkema’s sales, for instance, and for profits to be hit.

The company has been quick off the mark since its launch in May 2006, however, consolidating and cutting costs to try to raise manufacturing efficiencies.

The proposed acquisition of Swiss specialty polymers firm Coatex adds strength in the important acrylics segment. It reduces Arkema’s exposure to cyclicality by adding downstream integration.

Arkema’s cutbacks, backed by a clearly stronger entrepreneurial management culture, will stand it in good stead. The company has some attractive businesses.

The restructuring programme, alongside the right investments, can help drive the double digit growth expected under current targets.

Arkema has benefited from restructured vinyls. Restructuring has continued in thiochemicals, acrylics and fluorochemicals. The company is pushing for capacity growth in hydrogen peroxide in Europe and acrylics in India.

Such new capacities will help lift growth in 2008 and management appears confident that profits (earnings before interest, tax, depreciation and amortisation - EBITDA) growth of 10-15% between 2006 and 2008 is achievable.

Arkema’s EBITDA margins in the first quarter were only 9%, below the industry average, but the aim is for a return at this profit level of closer to 12%.

The pace of restructuring too cannot slip at Lanxess, the Bayer spin-off, which has shown the rest of the industry what can be done with difficult businesses if problems are faced head-on.

Lanxess management has clearly set out the agenda for change and largely stuck to it. The positive response to change has been the sharp rise in the share price.

Late last month, Lanxess publicised its agreement with petrochemicals major INEOS to put the Lustran acrylonitrile butadiene styrene (ABS) business into a joint venture which INEOS is expected to acquire.

Lanxess has cut back hard, restructured and continues to look at where it can lift margins to a reasonable level. The global Lustran business presented real problems. The Saltigo fine chemicals operations are also underperforming, although Lanxess holds this business at arm's length.

For Lanxess, as for Arkema, 2007 has to be a year for grasping opportunities: to restructure, sell and possibly to buy. Management suggests it has learned a lot from the Lanxess restructuring. It wants to be involved in the business of turning other underperforming assets around.

One goal is to have no business producing in 2009 an EBITDA margin of less than 5%. It produced a full-year EBITDA margin in 2006 of 9.7% against Arkema’s 7.2%, according to its own data. The Lanxess competitor average was 12-14%.

Lanxess has access to a modest war chest so it could make a sizable acquisition.

It needs to seize the advantages offered, however, by the current window of opportunity. It says it remains confident for the global business environment in 2007, although there are regional variations.

It cannot see any respite from high, and volatile, raw material prices until the third quarter at the earliest. Against that backdrop, however, the company can perform. Its latest guidance is for mid-to-high EBITDA growth, pre-exceptionals for the full year.

Lanxess’s shares have fallen by 5% since the beginning of the year and were trading at €40.10 late on Wednesday 11 July. They are up from €30.65 a year ago.

Arkema’s shares were trading at €47.59 at the same time, up 77.6% since listing on 16 May 2006 and a 24% gain over the past six months.

($1 = €0.73)

By: Nigel Davis
+44 20 8652 3214

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