INSIGHT: Solvay/INEOS vinyls merger underscores Europe weakness

07 May 2013 16:15  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--You need to look at the Solvay/INEOS vinyls deal from a Europe PVC and a US shale perspective.

The European PVC business now is tough to say the least. Costs – ethylene and electricity – are high. Demand is a staggering 30% lower than at the peak of the last cycle in 2007 because of the collapse in construction and weak economic activity across much of Europe. Prices are weak.

And, as Solvay puts it, scenarios for the European and the US energy petrochemical businesses today are so different.

Solvay CEO Jean-Pierre Clamadieu said earlier this year that he expected lower-cost ethylene in the US ultimately to put a cap on European PVC prices.

The proposed joint venture will include the bulk of Solvay’s European vinyls businesses from chlorine/caustic to polymer and the INEOS chlorvinyls operations, held under its subsidiary Kerling.

It gives both companies the opportunity to make cost savings. Not plant closures they say, but the sort of savings that come from combining purchasing, production expertise, logistics, sales and marketing. There is, however, significant overcapacity in the European chlor-alkali market.

The new joint venture would have eight membrane cell chlor-alkali plants as well as a few mercury cell rooms which will have to be converted before a European ban on mercury cell production of chlorine and caustic soda is enforced.
Solvay/INEOS chlorvinyls plantsThe ethane element comes into it in INEOS’s plans to crack more of the gas in Rafnes, Norway (the Rafnes cracker is not part of the proposed joint venture), as well as the Switzerland-registered company’s ability to import deep-sea ethylene from its new terminal in Antwerp, Belgium.

INEOS will, then, to some degree, be able to pass the US ethane advantage to the European vinyls operations. It will import shale-gas ethane from Marcus Hook in Pennsylvania.

Solvay is not upstream integrated into ethylene and is a major buyer in the European market. The SolVin stake in a small cracker in Feyzin in France will go into the joint venture. SolVin is a vinyls joint venture between Solvay and BASF.

For Solvay this is a well-planned and staged exit from the PVC business, one of its two remaining highly cyclical petrochemical operations – the other being polyamide.

The partners have been discussing the implications with the European commission anti-trust authorities. This is a European deal and the two companies together have a significant proportion of the European PVC market.

On the other hand, looked at globally the €4.3bn ($5.7bn) turnover, €257m recurring earnings before interest, tax, depreciation and amortisation (REBITDA), business would be number two globally by PVC capacity, excluding producers in China. Japan's Shin-Etsu is currently world leader.

The Solvay businesses going into the venture had sales in 2012 of €1.9bn and include seven plants in five European countries with five membrane cell rooms.Solvay INEOS vinyls JV plant details
Most of the INEOS Kerling chlorvinyls businesses would go into the joint venture. The operations earmarked had sales in 2012 of €2.4bn from 10 plants in seven European countries including three membrane cell rooms.

‘Put’ and ‘call’ options in the proposed agreement mean that Solvay will be in the joint venture for a minimum of three years or a maximum of six.

“This is not a quick and dirty exit of the PVC business,” Clamadieu said. “We will be exiting this joint venture at the latest six years after its formation.”

Parallels have to be drawn with the Arkema exit from PVC and the Klesch Group’s actions following the creation of KEM ONE from the French specialty chemicals group’s vinyls businesses last year.

The upstream vinyls business of KEM ONE, part of the Klesch Group, was placed into receivership at the end of March. Earlier, Swiss-based industrial company Klesch Group said that month that it was seeking €310m in compensation from Arkema for “misrepresentations” in the divestment of its vinyls business. Arkema refuted the claims, stating that negotiations on the transfer of its vinyls businesses were fully transparent.

Solvay has negotiated a €250m cash payment on creation of the new joint venture (completion, after regulatory approval, is planned for before the year end). It has agreed to exit the venture on payment of an amount equivalent to 5.5 times “mid-cycle” REBITDA and an automatic exit after the sixth year.

Clamadieu has called the agreement a “very significant milestone” for the Solvay Group, which, if the venture agreement goes through as planned will leave Solvay with less than 4% of its consolidated REBITDA in commodity petrochemicals – the polyamide business – and its sale split evenly geographically between Europe, Asia and the Americas.

The INEOS Kerling business is highly leveraged and production cutbacks are being made in the face of weak European market dynamics for its chlor-alkali and vinyls products. It is not clear what further restructuring INEOS might have to undergo to ultimately underpin the finances of the new operations.

(charts source: Solvay)

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By: Nigel Davis
+44 20 8652 3214

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