March 2010 Archives

Things are looking pretty tough for Europe's secong largest soda ash producer, Poland's Ciech. First its privatisation was delayed as it struggles to refinance its Zl1.56bn debt burden. Now analysts predict weak demand for its core product due to competition from imports of natural soda sourced from Turkish trona mines.

Erste Bank said in a note: "Weaker market demand and competition from natural soda imported from Turkey to European markets are the main reasons for the weaker prices assumed for 2010." It predcits the soda ash price obtained by the Polish company would fall from zloty (Zl) 711 ($249, €182)/tonne in 2009 to Zl 680/tonne this year.

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In its recently published IPO prospectus, German chemical group Brenntag raises the prospect of  "substantial fines" and the forced divestment of assets at below market prices if it is found to be in violation of antitrust rules.

The group has been embroiled in investigations in France and Germany for a couple of years and the outcome of these probes is now well overdue. Should they come to fruition in the middle of the IPO, it could prove highly embarrassing and potentially damaging to the success of the IPO. Of course, the company could be found totally innocent: we are all waiting with baited breath.

Here is a quote from the prospectus:

"We could incur substantial legal fees and potential sanctions in connection with antitrust matters. We are exposed to the risk that governmental bodies may take legal action against us under antitrust laws.We are currently subject to pending antitrust actions, including in Germany and France, and we could become subject to further public or private proceedings in these or other jurisdictions in the future. If we are found to be in violation of
antitrust laws, we could incur substantial fines or other penalties and may be required to divest assets (potentially at prices significantly below their market value or below their carrying value on our books). The legal fees we could
face in these proceedings could also be significant. Any of these consequences of one or more antitrust actions could have a material adverse effect on our business, financial condition and results of operations."

Burdened by at least $406bn in national debt, (and anti-government riots -see right), Greece is now considering the sale of many assets, including its 35.5% stake in Hellenic Petroleum which produces chemicals including MTBE, caustic soda, chlorine and PVC at its main Thessaloniki plant.

According to the Wall Street Journal, its stake in Hellenic is worth E888m. Hellenic's website describes its chemical operations as follows:

"The Group owns and operates the largest petrochemicals/chemicals complex in Greece. The complex is located in Thessaloniki and produces polypropylene, industrial aliphatic solvents (white spirit, hexane, etc.) and caustic soda/chlorine.

The petrochemical units are integrated with the Thessaloniki refinery and pentane, naphtha and light kerosene are used as raw materials for the industrial solvents production units. The petrochemical units are using the refinery's common infrastructure, including supplies and maintenance.

The sector's infrastructure includes storage and distribution installations for petrochemical products as well as an extensive sales network.

The Group, as the sole producer of petrochemicals in Greece, is the dominant player, enjoying large domestic market shares.

In parallel, it holds a 35% interest in ARTENIUS HELLAS S.A., located in Volos, a company which produces the PET resin used in food packaging and beverage bottling. Part of the PET production is sold in Greece through the Group's chemical sales network.

In the framework of the restructuring of the petrochemicals sector and the development of new, technologically advanced and high value-added products, the Group has further advanced the vertical integration of production with the construction of the propylene production unit in Aspropyrgos, the polypropylene unit in Thessaloniki and the BOPP film unit in Komotini.

The polypropylene unit is the most important project with an investment of approximately €150m. The unit has an annual capacity of 220 thousand tons, sufficient to meet domestic manufacturing requirements and to permit exports to neighboring countries. Propylene is used as a raw material and is transported with special tankers mainly from Aspropyrgos. A part of the unit's production is used as raw material by the DIAXON plant in Komotini for the production of the BOPP film.

According to the ICIS plants and projects database, Hellenic has the following assets:

 Company Country Location Product Capacity Status Contractor
 Hellenic Petroleum SA Greece Athens Methyl tertiary butyl ether 70000 tonne/year  Operating 
 Hellenic Petroleum SA Greece Thessaloniki Caustic soda 45000 tonne/year  Operating 
 Hellenic Petroleum SA Greece Thessaloniki Chlorine 40000 tonne/year  Operating 
 Hellenic Petroleum SA Greece Thessaloniki Polyvinyl chloride 100000 tonne/year  Operating 

Univar plans to expand into Romania and Russia in the coming years as part of a growth strategy in central and eastern Europe (CEE), the global chemical distributor tells my colleague, Elaine Burridge.

Univar is really pushing ahead at present, under new CEO John Zillmer, appointed last October. Since then it has purchased European distributor Quaron  (subject to regulatory approval) and made several board level appointments.

General manager for the region, Mirko Schnitzler, said the company was pursuing a strong expansion initiative in the CEE, prioritising countries by market size and how they were developing.

"We are looking initially at the personal care and paints and coatings sectors in Russia, and probably the food market in Romania," said Schnitzler.

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Image credit http://www.univarcorp.com/aboutus/images/aboutus_johnzillmer.jpg 

Economies in Central and Eastern Europe grew strongly in the 2000's, fueled by cheap credit from Western banks who saw the region as a superb investment opportunity. As my recent editor's blog entry suggests, newly-found political stability and high levels of economic growth made investing there seem like an obvious choice. Vast sums of money flowed in, fueling a property boom based on easy credit. When the banks pulled out, parts of the region were left high and dry.

As economies contracted, so did the chemical industry and there were some high profile victims such as Czech resin producer, Spolchemie, and Hungary's PVC-maker BorsodChem.

Now a new report by PWC suggests there will be a gradual recovery in foreign direct investment in CEE by 2013.

Here are some of the key findings:

- The central and eastern Europe (CEE) region experienced a five-fold increase in foreign direct investment (FDI) inflows between 2003 and 2008, rising from US$30 billion to US$155 billion. Russia was the destination which attracted much of this additional investment as its inflows rose from less than US$8 billion in 2003 to more than US$70 billion in 2008.

- The credit crunch and recession that ensued coincided with a collapse of FDI inflows to the CEE region. In the region as a whole, FDI inflows were 50% lower in 2009 when compared to 2008.

- PWC estimates that FDI to CEE declined from US$155 billion in 2008 to US$77 billion in 2009. Looking ahead, FDI is projected to recover only modestly from 2010 onwards and could reach around US$172 billion by 2014.

Here is the report:

A source close to the purchase of US Dow's Styron business unit by private equity group, Bain Capital, tells me that there was not a huge amount of detail available to potential purchasers in the run up to the sale.

The fact that Bain Capital went ahead with the purchase, despite this lack of detail, shows just how much confidence Bain must have in the recovery of M&A in chemicals, according to the source. Bain must have real confidence that their business plan - plus a global economic and chemical-industry recovery - will allow them to exit with a handsome return on investment.

In fact, the source went further and said the purchase indicates that "recklessness" may be returning to chemicals M&A. During the run up to the financial crisis, chemical-company valuations exploded as in a boom fueled by private-equity funds. Trade buyers could hardly get a look in, it sometimes seemed.

Some high profile bankruptcies since then have proven how reckless this behaviour was. Let's hope those days do not return.

Severe economic problems in Ukraine and neighbouring countries since the financial crisis have really hit demand for chemicals hard. GDP plummeted by 15% last year with all sectors of the economy affected.

According to a new report out by companiesandmarkets.com, the construction sector virtually ground to a halt, with activity falling by around a half.

All this is grim news for chemical producers in Ukraine. The report says from January-November 2009, production of commdity plastics totalled 279,500 tonnes, down by 32.5%.

It suggests that demand will not recover to 2007 levels until 2012 at the earliest. This seems to be roughly in line with most recovery forecasts. The industry should receive a boost in the 2010-12 period as a result of construction and other activity related to the country's joint hosting of the UEFA football championships.   

Profits will be hard to find: "Ukrainian petrochemicals sector will be operating at around 70% capacity - which is well below the 80-85% level which we regard to be the break-even point for the industry. The economy will begin a modest recovery in 2010, with GDP real growth at just 1.9%, with higher rates of growth in subsequent years."

With Russia in the doldrums for the foreseeable future, Ukraine will need to turn its sights to the Eurozone for exporting opportunities. Of course this region is only staging a shaky recovery at best too. 

Fortune magazine has revealed the results of its survey of most admired companies, including a breakout of top chemical companies. Here is the list:

Company   Industry   Overall score
1  BASF  7.04
2  DuPont  7.03
3  PPG Industries  6.96
4  Bayer  6.87
5  L'Air Liquide  6.36
6  Dow Chemical  6.11
7  Linde  5.97
8  Mitsubishi Chemical  5.63
9  Akzo Nobel  5.54
10  Sumitomo Chemical  5.40
11  SABIC  5.28
12  Sasol  5.19
13  Asahi Kasei  5.10
14  Evonik Industries  5.02
15  ChemChina

Looking at the top 50 listing for all industries, DuPont appears at 49. This seems to be an anomaly as BASF scored higher but is nowhere to be seen.  

Fortune surveyed businesspeople to ask who they most admired. There is an interesting breakdown for best and worst in areas like social responsibility and global responsibility. 

The privatisation of Poland's chemical sector stumbles on, having been subject to many delays and alterations. The latest deadline is March 22, the date by which German group Petro Carbo Chem should acquire ZAT and ZAK, having been awarded exclusive negotiating rights. It and two other unspecified bidders were told they could resubmit binding bids for Ciech--also billed as Europe's second largest soda ash maker--once it had managed to roll over its debt.

I'm in the middle of editing an article by Prague-based ICIS stringer, Will Conroy, on this very subject. It is heartening to read quotes from current deputy treasury minister Adam Leszkiewicz - seemingly filled with a heathly dose of realism. If this guy is making the decisions, there is more chance of success for this much-needed process:

"If those past decisions had been made according to business and not political logic, many companies would by now be operating with a new investor instead of fighting off financial problems... One cannot focus, however, only on what could and should have been done. We live in a specific market reality within which we have to operate, rather than waiting--and nobody knows for how long--for the good times to return."

Good bids that could lead to a successful conclusion of the renewed privatisation were being received despite the investment climate "but, let us be honest, they are not going to be competitive if compared with those from the booming economy times", Leszkiewicz  added.

Yulia Tymoshenko, Ukraine's prime minister, has failed to secure a majority in the country's 450-strong parliament.

This moves her newly-elected rival, president Viktor Yanukovych, a step closer to removing her from office. Yanukovych, who beat Tymoshenko in February 7 elections, is trying to consolidate his position. The country has suffered from a lack of strong government and last year saw its economy shrink by 15%.

The chemical sector there must live in hope that Ukraine's political paralysis will soon pass so that the govenment can get on with the task of kick-starting the economy there. Cuts to gas supplies last winter affected chemical production as feedstocks were cut.

Ukraine has huge potential for chemical demand growth. It has a large population for the region at 46m and a nascent middle class. Per capita GDP reached $7,342 in 2008, according to Wikipedia.

Image credit Wikipedia 

Russian chemical major Sibur has had to endure collapsing domestic demand in Russia, like all its peers. In an interesting presentation (see below), given by Viktor Viehweg, the company's head of strategic development, he reveals the threats and opportunities posed by the crisis (see slide page 9).

Sibur is threatened by falling demand for products, negative margins, increasing international competition on the domestic market and lack of available financing.  Opportunities include competitiors cutting their investment plans, low priced acquisitions and lower engineering costs.

Viehweg was interviewed by ICIS Chemical Business journalist, Anna Jagger, during February's Global Petrochemical Conference in Vienna organised the World Refining Association. I'll post the article when it is published.

Following several press reports that German chemical distributor, Brenntag, will seek to launch its IPO by Easter, the next big question is: "What next for Brenntag?"

The IPO, if successful, will give Brenntag a much-needed injection of capital and scope to grow organically and through acquisitions. The company is already strong in the US and Europe, and would most likely end up facing questions from competition authorities if it tried further major acquisitions there.

But it has big holes in Asia: it does not have a big presence in India and China, for example. Apart from a subsidiary in Taiwan and some branch offices, Brenntag's main assets in Asia are the $400m sales distribution business of French chemical group Rhodia, which it purchased in September 2008.

This division has operations in Australia, India, Taiwan and the ASEAN countries of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. It sells a range of chemicals including adhesives, coatings, elastomers and sealants to industries related to personal care, food, animal feed and electronics.

It added a new operation in Hong Kong during 2009, according to its website.

German newspaper Frankfurter Allgemeine reported chief executive Stephen Clark as saying more acquisitions are planned as the market continues to consolidate. He said Brenntag may buy large rivals in Asia, and these buys could be worth considerably more than its usual acquisitions, while remaining under E100m per transaction.

The report said the main reason for Brenntag's planned IPO is to strengthen the company's capital base in order to help finance future growth. The report said that since 2007, Brenntag has acquired 21 companies with a combined value of E230m. The newspaper reported that Brenntag will also be able to reduce its debts thanks to the capital increase that will form part of its upcoming IPO. The daily cited Clark as saying that the IPO, slated to happen in the coming few weeks, will involve a E500m capital increase.

According to CEO Clark, quoted in the Financial Times, the company's earnings before interest, tax, depreciation and amortisation rose by more than 17% in the past five years. Its EBITDA margin came in between 5 and 7.5% in those years. In the past year, the group managed to hold its operating profit almost steady at €477m, despite a revenue drop of 14% to €6.4bn.