INSIGHT: Solvay looks for emerging market growth and cyclical fix

18 February 2013 17:26  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Belgium’s Solvay is making cost savings at a faster pace than expected following the merger with specialty chemicals maker Rhodia. And even though integration of the two businesses is largely complete, there are more levers to pull; more streamlining to come; and the realignment of some product portfolios.

Combine that with the top line growth expected from capacity expansions and management is convinced it can hit a 2016 target of €3bn ($4bn) recurring earnings before interest, tax, depreciation and amortisation (REBITDA).

REBITDA before exceptional charges and gains last year were up just 2% at €2.07bn with “severe margin erosion at Solvay’s cycle sensitive segments”, the company said on 14 February, compensated by healthier returns from some of the growth and more resilient products.

Vinyls and polyamide were hard hit. Globally, polyvinyl chloride (PVC) volumes and sales were down 6% because of the downturn in construction. The Vinythai business in Thailand was sold out but European volumes were lower. The sales and volume statistics were affected by the decision at the year-end to exit the Latin American chlorvinyls venture Indupa in which Solvay has a 70% stake.

Solvay’s polyamide materials businesses sat within its Rhodia reporting segment in 2012 and posted 49% lower REBITDA for the year. The company talked of “lacklustre demand, deteriorating operating leverage, and poor pricing power,” as the reason for the downturn. Volumes were down 5% largely because of lower activity in the automobile sector and a “very tough competitive environment”.

Solvay clearly has to make some moves to address underlying competitive issues in both businesses. The European chloralkali and vinyls businesses are operating in an increasingly tough competitive environment and 2013 is likely to be difficult.

Solvay has almost completely made the switch from mercury to membrane cell chloralkali production (it has a mercury cell plant in Spain) but still operates in a high electricity cost environment. In the vinyls chain it is exposed to the ethylene price which fluctuates with crude and naphtha.

Relatively lower polyvinyl chloride (PVC) prices in North America, which can be put down to cheaper electricity and ethylene due to the ready availability of natural gas and ethylene from shale, are expected to put a cap on prices in Europe.

Solvay is also hurt by high butadiene prices (because of the shift globally towards more gas and less liquids cracking) in the polyamide chain businesses. And again, it operates in a high natural gas cost environment in Europe.

The PVC business is a significant cash generator for Solvay and the company continues to make money in the extremely difficult, oversupplied European market environment. “The challenge there is how we can directly or indirectly contribute to some kind of restructuring in this market,” CEO Jean-Pierre Clamadieu told ICIS in a recent interview. Solvay is actively seeking a solution for PVC, he said on 14 February.

Rhodia said on the same date that it was working to lift polyamide profits by €100m by 2014 – they were €99m in 2012 on sales of €1.70bn. The plan is to improve plant efficiencies and profitability and to differentiate its product offerings to distinguish between low cost to service and high cost to service models.

Clamadieu believes that Solvay can extract more value in some product areas by re-defining its business model for engineering plastics making a clear distinction between commodity and speciality products.

The portfolio reshaping at Rhodia will very much be centred around the PVC and polyamide businesses and in soda ash in southern Europe. The company has already made some small ex-Solvay life science divestments to focus more clearly on fluorine chemistry.

Under the company’s new organisational structure, which takes effect this year, the ‘functional polymers’ segment, which includes the PVC and the polyamide businesses, represented only 11% of REBITDA in 2012. From a market standpoint consumer goods represented 28% of sales with construction 14% and automotive businesses 12%.

And while the streamlining and portfolio reshaping might be important it does look as though increased capital spending and bolt-on acquisitions will help drive growth towards the 2016 target.

Twenty thirteen was a difficult year but large parts of the Solvay portfolio were able to perform well. And operational restructuring will see product chains given more clarity and should allow for more cost savings. Business managers are being given more autonomy – they are already in a position to run global businesses.

The operational streamlining thus far has had a clear affect and helped the company beat its own cost-saving expectations. Purchasing and logistics synergies last year, for instance, were well ahead of initial plans and helped offset the difficult trading conditions in the more cyclical businesses such as PVC and polyamide. Cost savings of €400m are now likely to be reached by 2014 rather than in 2015 as originally planned.

Clamadieu has called 2012 “a very important year” and one which saw largely the completion of the Solvay, Rhodia merger. The portfolio is well-balanced, he says, as is the group’s geographic exposure as demonstrated by the relatively strong performance in a difficult year.

The focus on costs, including working capital, helped the company generate free cash flow of €787m and to pay down net debt to €1.1bn from €1.8bn at the end of 2011.

Capital expenditure will be increased this year, however, from €785m in 2012 to €900-€950m in 2013. Two current projects stand out, the one to increase guar derivatives capacities by 40%; the other to add a new dispersible silicas plant in Poland to serve increasing demand in tyre markets. The company uses naturally-derived guar gum in its oil-field chemicals business and is seeing strong growth in the fracking industry in North America.

Clamadieu sees North America as an important growth area with the economy strengthening and shale and the automobile industry helping to lift group sales.

He is also more confident on China. “China is strengthening,” he said. “We are seeing in our order book clear signs that China is coming back to growth.”

Brazil is not matching its potential, he suggests, while European growth is still questionable. Some markets come back after the New Year and 2012 year-end de-stocking, but some much less than others.

Financial analysts think that the company can continue to save costs while growing strongly in speciality plastics and consumer chemicals although some feel that 2013 may be a lower growth year. Solvay will give 2013 earnings guidance with its first-quarter results.

Clamadieu is also keen on India as an emerging market of some importance for Solvay.

The company needs to invest further in the sub-continent, he suggests – it has a presence in India in personal care and in engineering plastics and last year opened a research and development centre in Savli in the state of Gujarat.

A couple of small acquisitions were made in India in 2012 and Solvay is looking at other opportunities to grow, he said.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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