INSIGHT: To build or to buy - the choice facing PET producers

22 June 2011 16:43  [Source: ICIS news]

By Sam Weatherlake

HOUSTON (ICIS)--Even as the process of consolidation among polyethylene terephthalate (PET) manufacturers continues with DAK Americas’ acquisition of Wellman, producers are driving forward with plans for massive capacity expansion in the US and Europe.

Their stated intention is to take advantage of the increased capacities and more efficient processes that integrated operations and newer technology make possible.

In May, Italy’s Mossi & Ghisolfi (M&G) announced that it would build a 1m tonne/year PET plant in the US Gulf coast region, together with a fully integrated 1.2m tonne/year purified terephthalic acid (PTA) plant, both of which could be completed by the end of 2013.

The company planned to use its proprietary EasyUp PET technology, currently employed at M&G’s Suape plant in Brazil, as well as “the latest generation PTA technologies”.

“As a result of demand growth fully recovering in 2010 and of several plants in North America having closed or been sold over the past few years, the industry supply/demand balance has now been restored, creating room in the market for our new plant,” M&G said.

“In spite of some recent restructuring, we believe the majority of [PET and PTA] plants in [the North American Free Trade Agreement] are undersized and high cost to run, and may not be globally competitive,” elaborated Fred Fournier, global marketing and sales director at M&G Polymers USA.

An industry consultant said at the time that M&G’s announcement had come as a surprise.

“Building another large plant in the US will happen one day, and it will probably cause some older assets to close, but in the next 30 months it is hard to see the economic justification,” the consultant said.

Another company that sees potential for extra capacity - this time in Europe - is Thailand’s Indorama, which opened a new 432,000 tonne/year PET facility at Decatur, Alabama, in March 2010, and has also participated in the consolidation of the US PET industry.

Indorama completed the acquisition of Poland-based PET manufacturer SK Eurochem in March 2011, together with its 140,000 tonne/year plant at Wloclawek.

In early June, Indorama announced its intention to build a 220,000 tonne/year expansion project at the Wloclawek site. The project, which is scheduled for completion in 2013, will source PTA from PKN Orlen’s new 600,000 tonne/year plant, also located in Wloclawek.

In May, Indorama had also revealed plans for a 250,000 tonne/year expansion at its PTA plant in Rotterdam, the Netherlands, boosting its European PTA capacity by 46% to 792,000 tonnes/year by 2014.

“The vertical integration strategy has been proven to provide us superior stability with an above average return on our total value chain,” said Indorama group CEO Aloke Lohia.

In the meantime, rising costs and narrowing margins have prompted a rapid consolidation of the US PET industry over the past year, with DAK Americas being the most acquisitive player.

DAK Americas, a subsidiary of Mexican conglomerate Alfa, will acquire US-based Wellman's PET business for approximately $185m (€130m), the company announced on 16 June. The deal should close in the second half of the year, pending regulatory approval.

DAK’s acquisition of Wellman's 430,000 tonne/year Pearl River plant will bring its total US PET production capacity to almost 2m tonnes/year, according to ICIS Plants and Projects. The remaining 1.5m tonnes/year of US PET capacity is divided between Indorama, M&G and Taiwan’s Nan Ya Plastics.

In October 2010, Eastman Chemical sold its US PET business, comprising two PET plants and one PTA unit, to DAK for $600m. Indorama acquired Invista’s PET operations in the US and Mexico in November 2010 for an estimated $229m.

The rush of acquisitions coincided with a sharp rise in feedstock prices, namely paraxylene (PX) and monoethylene glycol (MEG), which was attributed to an increase in demand for polyester fibre following poor cotton harvests in Asia. PX and MEG are also required to make polyester fibre.

Tight PET supply in Asia precluded exports to the US in early 2011, providing US producers with the opportunity to increase prices and thus improve their margins. Feedstock prices began to fall in the second quarter of 2011.

While the latest squeeze on feedstock costs and availability seems to have ended, it is clear that the global PET industry has entered a much more volatile era. Protecting margins is therefore likely to represent more of a challenge in the future.

As smaller players ease themselves out of the market, the survivors are pursuing different policies: whereas DAK is now close to controlling a majority of US production capacity through acquisitions, M&G is pinning its hopes on the application of emerging technology on an unprecedented scale, while Indorama is dividing its energies between acquisition, expansion and construction.

One theme that runs consistently through the strategies now being adopted by industry participants in the US and Europe is the pressing need to develop economies of scale - regardless of whether they are built or bought.

Additional reporting by Will Conroy, Anna Jagger and Caroline Murray

By: Samuel Weatherlake
+44 20 8652 3214

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