Looking beyond the GM bankruptcy

gm-meltdown.jpgThe bankruptcy filing of the once dominant US auto giant General Motors (GM), though widely expected, will have ripple effects across the supply chain.

Businesses will be sold off and shut down, and production will shift to smaller, more fuel-efficient cars, as GM seeks to transform itself into a leaner, more cost-competitive company.

The chemical industry itself will take its lumps as automakers struggle and shift away from producing larger vehicles, which consume more materials. However, this gives the industry a great opportunity to innovate new products and materials suited for fuel efficiency – from increasingly lighter-weight plastics to improved tires that reduce rolling resistance.

The GM bankruptcy coincides with another historic event in the chemical industry.

US-based chemical firm Solutia has completed the sale of its $2bn nylon business for $50m in cash to private equity firm SK Capital Partners II. In addition to the cash proceeds, Solutia will get $4m in annual payments of $1m/year starting in 2011, and retain a 2% stake in the business. Plus, SK will take over $80m in pension liabilities.

All in all, Jefferies & Co. analyst Laurence Alexander estimates Solutia sold the nylon business for $202m in economic value, including working capital adjustments.

Solutia chairman, president and CEO Jeffry Quinn called the sale a “watershed event in the history of our company.”

“The nylon business was the [primary] business of Monsanto at one point,” he said. “It marks the end to a 50-plus year history of being a part of our business… (and) will help define the course of the company for years to come.”

With the sale, Solutia becomes what it calls a “pure-play performance materials and specialty chemicals company,” selling plastic glass interlayer, window films, rubber chemicals, and hydraulic and heat transfer fluids.

While around 60% of its annual sales comes from the automotive sector, the company has survived and emerged through bankruptcy, and remains profitable, even in these “worst of times.”

CEO Quinn reaffirmed guidance of $325m-$350m in earnings before interest, taxes, depreciation and amortization (EBITDA) for 2009, and Wall Street expects Solutia to earn 50 cents/share this year and 83 cents/share in 2010.

Looking even further ahead, investors may flock to the company’s shares as a play on the eventual recovery of the automotive sector.

Already, investors are applauding the deal, sending shares of Solutia up $0.59, or 10.9%, to $6.02 in early Tuesday afternoon trading.

Graphic credit: The Cleveland Leader

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2 Responses to Looking beyond the GM bankruptcy

  1. John Richardson 4 June, 2009 at 2:44 am #

    Hi,Joe

    Nice piece on GM.

    What would be interesting is to quantify in volumes terms (e..g how much lost PP demand?) the GM bankruptcy will mean for chemicals, and which plants might have to shut down.

    On the positive side there will also be some gains around greater use of lightweight plastics – meaning, more opportunities for innovation. But, again, your standard US commmodity-based players look as though they could be under even more pressure.

    A separate and equally interesting theme to explore might be how the new fuel-efficiency regulations will impact feedstock pricing and availability for petrochemicals. Less gasoline demand equalling more naphtha availability in the short term until refinery capacity is rationalised in the US and Europe?

    Further, I am trying to figure out (and would need to talk to Shell etc about this) what the implications would be of greater diesel demand, due to the fuel efficiency rules, on mixed-feed cracking. What would the value of hydrowax be out of a hydrocracker as hydrocackers are primarily set up to make diesel and LPG? Also in general, would the heavier ends from the distillation column gain more value into transportation fuels?

    Chrs
    John

  2. ICBchief 4 June, 2009 at 3:31 pm #

    Thanks for your comments John! Yes, there are going to be many implications of the massive shakeup in automotive.
    Interesting thing is that GM is seeing some signs of a pickup in demand after its announcement, though this might be temporary.
    But no doubt new cars are going to be smaller, lighter and more fuel-efficient, putting pressure on bulk commodities like PP and polyurethanes.
    Time to shift to higher value-added lightweight components.
    Would be glad to hear your (and Shell’s) thoughts on impact from the new fuel efficiency standards.

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