Market outlook: Indorama CEO targets next phase of growth for the #1 PET producer

CEO Aloke Lohia has an ambitious growth plan featuring M&A, a focus on high value-added businesses and back integration. Sales could more than double by 2018

The world’s leading producer of polyethylene terephthalate (PET) is not shy about building out integrated positions through new projects, expansions, as well as mergers and acquisitions (M&A). Yet Thailand-based Indorama Ventures Ltd’s (IVL) next phase of growth will take on a more differentiated aspect – that of adding high value-added (HVA) PET and other fibre products to its portfolio, according to CEO Aloke Lohia.

“The next phase of growth for IVL will be in non-commodity, HVA differentiated businesses, whether in polyester, nylon 6,6 or polypropylene-based (PP) fibres,” Lohia said in an interview with ICIS.

The company has around 8m tonnes/year of total capacity, he noted. In 2013, IVL generated $7.5bn in sales, of which 27%, or $2bn, came from HVA businesses. The HVA portion contributed 34% of its $487m in core earnings before interest, tax, depreciation and amortisation (EBITDA).

Indorama’s PET plant in Asheboro, North Carolina, US has capacity of around 255,000 tonnes/year

“We plan to grow that HVA portion to $5bn [of sales] by 2018,” he noted.

These HVA businesses include PET, PP and nylon fibres for hygiene, medical and automotive applications rather than commodity applications in standard bottles and textiles (polyester). One HVA example is nylon 6,6 for automotive airbags and tyre cords.

IVL’s acquisition of Germany-based PHP Fibers with partner Japan-based Toyobo (IVL 80%, Toyobo 20%) in April 2014 brought expertise in nylon 6,6 and polyester filaments with a strong focus on the automotive sector.

IVL has an ambitious goal to grow total capacity to 12.1m tonnes/year and sales to $15.6bn by 2018.

“We always ask: Can our global footprint and skill sets help us in other regions and applications? Other polyester companies don’t think that way. They just build and get stuck in the cycle,” said Lohia. “We want to balance our revenue stream.”

EXPANSION INTO TURKEY
In expanding its ever-growing global footprint, IVL is making a big push into Turkey, in particular, as part of its overall focus on boosting it presence in the Middle East and North Africa (MENA) region.

“In the 1970s we started in Indonesia, in the 1990s it was Thailand and in the 2000s North America. Now we are focusing on the MENA region. We have no fear of acquisitions – we can acquire or build,” said Lohia.

In June 2014, IVL acquired Turkish PET resins producer Artenius Turkpet from Spain-based La Seda Barcelona for an undisclosed sum, adding 130,000 tonnes/year of capacity in Adana, Turkey.

“We expect to make further follow-on investments in this thriving economy of 76m consumers to replicate what we have built in Thailand as we see a similar opportunity to fully leverage on all our product portfolios,” Lohia said in June after the Artenius deal.

The deal came on the heels of IVL’s announcement in early April that it would acquire a 51% stake in Turkey’s Polyester Sanayi AS (SASA) for $62m and conduct a mandatory tender offer for the remaining stake.

SASA has integrated feedstock and polymer facilities producing dimethyl terephthalate (DMT), PET, polybutylene terephthalate (PBT) polymers, staple fibers, filament yarns and specialty chemicals with a total capacity of 600,000 tonnes/year, also in Adana, Turkey.

“The SASA site has a good array of HVA products. For DMT-based PET in particular, we have further room to grow. For certain specialty polymers, the products have been certified only through the DMT route. Re-qualifying PTA-based PET could be a long process. So many customers would like us to supply DMT-based products,” said Lohia.

PET can be produced using purified terephthalic acid (PTA) feedstock, or DMT.

ADDRESSING OVERCAPACITY
The global PET market appears mired in overcapacity, and further capacity is set to come on line, especially in China. Yet Lohia is unconcerned.

“As long as I’ve been in the business, since 1995, there has always been overcapacity in this market,” he said.

Producers constantly expand capacity to keep up with high demand-growth rates, he noted.

“If demand is growing at 10-15% per year in certain markets, producers must build capacity or they face losing market share,” said Lohia.

The CEO estimates global PET demand growth at 6% per year, with double-digit growth in markets such as China and India, but with mature markets in the US and Europe growing at about 2%.

Lohia emphasised that many plants run well short of stated capacity, because of seasonal fluctuations in demand (increasing in the summer and falling in the colder seasons) as well as the usual mechanical issues.

In addition, private enterprises will not run at high rates for long if the profitability is not there, he said.

“Don’t underestimate the private businessmen – they won’t run full out to kill the market. That may happen for a quarter or two, but sense usually prevails,” said Lohia.

Players in PET, including IVL, shut down less efficient plants as needed, he said.

“We mothballed our 150,000 tonne/year Workington, UK, PET plant early in 2014 as we can serve customers in Europe, including the UK, from recently expanded and more efficient plants in Rotterdam [the Netherlands] and Poland,” said Lohia.

IVL is expanding its Wloclawek, Poland, PET plant from 140,000 tonnes/year to 220,000 tonnes/year in a debottlenecking project that was slated to be completed in June. In Rotterdam, the Netherlands, the company expanded its PET capacity by 200,000 tonnes/year to a total of 390,000 tonnes/year in 2012.

In the meantime, IVL is delaying the start-up of its 500,000 tonne/year PET unit at Decatur, Alabama, in the US until the fourth quarter of 2016.

The company initially planned to start up the unit by the end of 2015 or early 2016, but this has been delayed “as demand growth is not so strong”, said DK Agarwal, CEO of IVL subsidiary Indorama Polymers, in May.

Indorama also plans to continue to back-integrate into PTA and monoethylene glycol (MEG) production, said Lohia.

“The PTA market is in dire condition, but we would rather invest now in the trough to prepare for when the market is in better balance,” he said.

IVL plans to debottleneck its PTA plant in Rotterdam from 375,000 tonnes/year, to 625,000 tonnes/year by the end of June 2015.

Back integrating further into paraxylene (PX), the main feedstock for PTA, IVL signed a joint venture agreement in December 2013 with Abu Dhabi National Chemicals (ChemaWEyaat) to build a new facility that would bring on 1.4m tonnes/year of PX capacity by 2018. ChemaWEyatt will own 51% of the venture, with IVL holding a 49% stake.

US CRACKER POTENTIAL
On the MEG feedstock side, IVL is in talks with potential partners for a new US cracker to secure ethylene supply for MEG.

“We are in principle interested in a US cracker and in discussions with potential partners. We produce ethylene oxide/ethylene glycol (EO/EG) in the US and can be a good partner for a new cracker as we are looking for offtake,” said Lohia.

Indorama purchases around 350,000 tonnes/year of ethylene in the US, noted Lohia.

“Along with the cracker, we would build a 750,000 tonne/year MEG plant, adding another 400,000 tonnes/year of ethylene feedstock requirement. This would bring our ethylene needs to about 750,000 tonnes/year, or half a world-scale cracker,” said Lohia.

“We will only partner – not build on our own,” he added.

However, there are growing challenges associated with building a new cracker in the US, the CEO noted.

“The capital costs are rising with so many crackers, derivative plants and fertilizer plants, so the final costs are unknown,” said Lohia.

“Even the cost of ethane is unclear – whether it will remain low cost in the years ahead. So with rising capital costs, uncertain ethane and potential oversupply, it could be challenging,” he added.

With demand growing slowly in mature markets such as the US and companies planning to build several new crackers and derivative facilities, much of the derivative products will be exported, said the CEO.

“Demand is where it is in mature markets. The US will have to export. Years ago, people were talking about the China price [being the cheapest]. But if all this capacity is built, one day we may be talking about the US Gulf Coast export price,” Lohia said. “So producers could be squeezed and the returns may not be as amazing as once thought.”