INSIGHT: A tale of three complexes

24 April 2013 17:09  [Source: ICIS news]

By Tom Brown

LONDON (ICIS)--Italian chemicals producer Versalis has “suffered from the persistent focus on our stagnant market[s]”, said CEO Daniel Ferrari at an analyst day in London last week.

Brought in to head the company in 2011, Ferrari laid out the ENI subsidiary’s woes with the candour of one who knows the problems are too significant to downplay.

The company derives 70% of its sales from commodity chemicals at a time when emerging market competition and the US shale gas boom are squeezing margins in the sector even further, and over 90% of its revenues are derived from the flat European market, with the Italian market representing 50% of its sales.

Versalis is also struggling with an ageing and under-utilised factory base that has PE and PP crackers running at under 60% capacity.

This over-reliance on low-margin products and significant exposure to shocks in the eurozone led to the company booking an operating loss of nearly €500m in 2012, and initiating drastic measures to arrest the downward spiral.

The company is targeting €300m EBIT by the 2017-18 fiscal year, which would represent a turnaround of nearly €800m profit within five years.

Some of the company’s turnaround strategy is predictable: Ramp emerging markets sales up to 20% of its total by 2017-18 from under 5% last year, reduce commodity chemicals production by 35% while increasing cracker productivity, and potentially tap into shale gas supplies from North America to increase ethylene margins.

But the company is also taking a less conventional tack, focusing on green chemicals such as bio-based rubber and butadiene.

“We will expand in areas with limited supply and strong demand growth, and where we have a competitive advantage, such as elastomers and green chemicals,” said Ferrari.

These measures are being concentrated on three sites in southern Europe that account for a huge proportion of the company’s losses. Facilities in Porto Torres, Sardinia, and Porto Marghera and Priolo, both in Italy, have accounted an average loss of €210m between 2008 and 2012.

Versalis’ 11 other sites have made a combined total of €110m on average over the same period. Not every plant was profitable, but those three facilities, termed “critical sites” by Versalis, are the key drain.

“The problems in our business are not pervasive or evenly spread among our 14 sites. We are talking of a concentration among three sites,” Ferrari said.

The ageing chemical complex and surplus ethylene capacity at Porto Torres lost Versalis an average of €70m per year in 2008-12. The facility is currently being converted in part to a seven unit biochemical production complex, through a 50:50 joint venture with Italian biochemicals firm Novamont known as Matrica.

Described by Ferrari as “our flagship”, the loss at Porto Torres has already been reduced by 70% by closing the superfluous cracker, according to Ferrari. Elastomer capacity – a key focus for the company – is being maintained, and the first two units of the Matrica joint venture are expected to be onstream by the end of the year.

Versalis predicts the site will break even by 2015-16, and that the joint venture will be generating EBITDA of €120m by the time the complex is fully operational in 2017.

A potential roadblock to this sort of development is the cost of sourcing sufficient bio-based feedstocks for the complex, which is expected to have an output of 350,000 tonnes/year of bio-based monomers, lubricants and plastics.  

Versalis has addressed this by employing 180 hectares of previously utilised agricultural land around the site to develop a thistle crop. Oil from the plants will be used as a renewable feedstock, and mass from the thistles will be used to power part of the site.

“For green chemicals, especially for the Porto Torres project, we are expecting much more stability in the feedstock, [than in a traditional petrochemicals complex],” said Versalis planning and control head Franco Meropiali.

The biggest money pit in Versalis’ portfolio has been the Priolo site, where an inefficient and oversized cracker and loss-making polyethylene (PE) plant have resulted in an average annual loss of €100m between 2008 and 2012.

“The PE plant is far from the market [and] has a product mix that is lacking differentiation,” Ferrari said.

The company plans to close the 150,000 tonne/year linear low-density polyethylene (LLDPE) plant, scale up cracker operating rates from current levels of around 55% to 90% in 2014, and build capacity to recover higher value C5 and C9 cuts from the cracker, which are currently being lost in the refining process.

A resins plant is also slated for development, with an estimated capital expenditure of €150m to bring the plant onstream by 2017. The company has closed agreements with local trade unions allowing it to move forward with the rationalisation and conversion of sites, and is predicting the efficiency measures being taken at the site will reduce the loss by €70m, and is targeting $250m sales by 2016.

Finally, there is Porto Marghera. A key link in Versalis’ northern Italian chemicals pipeline, the facility has lost an average of €40m per year over the last five years as a result of an “inefficient and under-utilised” cracker, in the words of the company, and a loss of site integration as former neighbours such as Dow Polyurethanes closed up shop there.

Although no plans for Porto Marghera have been announced of the magnitude of Priolo and Porto Torres, the site has been identified as a frontrunner for transformation through Versalis’ joint venture to develop bio-based butadiene with US renewable chemicals firm Genomatica, announced last week.

The restructuring measures taking place at these sites are part of a raft of similar measures being taken by the company, including a partnership with Yulex Corp to develop a guayule-based rubber plant, and an agreement with Pirelli to research applications for the material in tyres.

The debottlenecking and rationalisation of creaking, uncompetitive European sites will undoubtedly stem the scale of the losses at the plants. But with the economics of the Porto Torres project based on a compound annual growth rate of 20% for the European bioplastics market from 2008-20, even Ferrari admits that the success of this bold focus on bio-based petrochemicals is far from certain.

“Returns on the green chemicals business are [based on] a combination of the elimination of losses from existing sites, and then starting to bank on the development of the renewables market,” he added.

By: Tom Brown
+44 208 652 3214

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