Market outlook: Eastman mulls integration options with Taminco deal

CEO Mark Costa sees major opportunities to further vertically integrate and improve raw material cost positions while adding growth components in the Taminco deal

US-based Eastman Chemical plans to take advantage of raw material positions and combined purchasing power with its planned $2.8bn acquisition of global amines producer Taminco. The deal will also advance Eastman’s strategy of building a world-class specialty chemicals portfolio in attractive growth markets that is vertically integrated with key cost-advantaged intermediates.

Eastman leads a growing global business from its headquarters in Kingsport, Tennessee, US  Eastman Chemical

“On the cost side, we see product integration opportunities [with Taminco]. Three of the largest products Taminco buys are EO [ethylene oxide], methanol and ammonia, so we see ways to combine and improve our cost position,” said Mark Costa, chairman and CEO of Eastman Chemical, in an interview with ICIS.

And Eastman is long ethylene at its Longview, Texas, US site, where it has 1.4bn lb (635,000 tonnes/year) of capacity. It is operating a larger 800m lb/year cracker and two smaller 300m lb/year units. Another 300m lb/year unit is idle.

OPTIONS FOR ETHYLENE OXIDE
“At Longview we are long ethylene, so there are direct or indirect ways to improve our EO position in North America and potentially Europe,” said Costa.

“We have deep knowledge on how to build and run EO facilities, so there are options we would consider – building a plant or participating in an expansion,” he added.

However, Costa cautioned that the Taminco acquisition has yet to close. Taminco has 30 days from the 11 September deal announcement to “go shop” for a higher offer. The deal is expected to close by the end of 2014. Eastman and Taminco are both consumers of EO – Eastman for polyester specialty polymers and coatings and Taminco for amines. Eastman completed an EO capacity expansion at its Longview site in the second quarter of 2013. Eastman’s EO capacity at Longview is 105,000 tonnes/year, according to ICIS plants and projects.

Meanwhile, Eastman continues to evaluate options for its two smaller crackers at Longview, even as the dispute with Westlake Chemical over an ethylene pipeline connecting the site to Mont Belvieu, Texas, continues. Westlake raised the tariff on the pipeline flow in 2013 and is restricting bi-directional flow – something needed for Eastman to sell excess ethylene produced, according to Eastman. The issue also puts a snag in any potential sale of the crackers.

Costa hopes for a resolution later in the year from the Texas Railroad Commission. “We’ve had the hearings and are awaiting a decision,” he said. “Meawhile, we are exploring the sale of those two units and looking at ways to monetise that. Building EO with Taminco there is another option.”

METHANOL IN THE MIX
Eastman and Taminco are also major buyers of methanol. Eastman consumes methanol for acetyls and derivatives.

“Our Texas locations are ideal for sites to make methanol. So we would talk to companies with methanol projects or those that may be interested. We can participate in the offtake as we did with Enterprise’s planned PDH [propane dehydrogenation] plant,” said Costa.

However, Costa emphasised that Eastman is not interested in significantly expanding its commodity chemical footprint, as it focuses on its strategy of compiling a set of strong and diverse specialty chemicals businesses while maintaining an integration advantage on the intermediates side.

The company passed on the opportunity to build a PDH plant, and instead struck a deal with Enterprise Products to take product from the 750,000 tonne/year PDH plant Enterprise is building for start-up in 2015.

Eastman, which has capacity of around 570m lb/year of propylene for feedstock, satisfies two-thirds of its needs internally. The offtake from the Enterprise PDH plant will fill the other third, Costa noted.

“The US shale gas boom is driving a renaissance, and we have a great opportunity to improve our cost structure. We thought about the big asset plays such as PDH but chose not to build as this is not consistent with our specialty strategy,” said Costa.

Instead, production of intermediates further downstream – acetyls, olefin derivatives such as EO and monoethylene glycol (MEG), and paraxylene (PX) derivatives – to feed into specialties is a key part of its strategy.

VERTICAL INTEGRATION

“The beauty of our vertical integration is that we have scale and can take our intermediates into a wide range of specialty products,” said Costa. “We process key raw materials coal, ethane, propane and PX on a large scale so that we have very effective cost positions in specialties, and we are also flexible in what we can produce. The same polyester asset can make multiple products. That flexibility is one of the keys to success,” he added.

DIVERSITY A STRENGTH
Eastman’s diverse and integrated portfolio of intermediates and specialty chemicals is a “huge strength”, noted Costa.

“We embrace and like diversity. No end market is over 20% of our business and that gives us strength, as you never have business certainty in any one market. We have picked advantaged markets to operate in, and diversity has helped us,” he added.

Eastman has been selected the ICIS Company of the Year based on financial performance in 2013, including year-on-year growth in certain metrics. The announcement was made on 22 September 2014.

Eastman, with $9.3bn in sales in 2013, operates in three major raw material streams – acetyls, olefins and polyester.

Those streams feed into its diverse product segments of additives and functional products, advanced materials, fibres, adhesives and plasticizers, and specialty fluids and intermediates.

End markets are equally diverse, ranging from transportation; building and construction; tobacco; consumables; health and wellness; durable goods; industrial chemicals; energy, fuels and water; electronics; and agriculture. Eastman’s planned acquisition of global amines producer Taminco will add to that diversity, although they share certain raw materials.

Key end markets for Taminco are feed and agriculture, personal and home care, water and energy.

“There are opportunities for cross-selling to end markets across Eastman and Taminco. When you see the long-term revenue synergies, you get excited,” said Costa.

Total synergies from the combination – cost, corporate and revenue – are estimated at 5% of Taminco’s sales, Eastman noted in its 11 September announcement on the Taminco deal. In 2013, Taminco generated sales of $1.2bn. And Eastman’s diversity of raw materials also is an advantage, the CEO said. Major raw materials include coal, propane/ethane and PX.

“This year we’ve faced headwinds in propane costs but other parts of the business have been strong,” said Costa.

“Diversity is needed to deliver long-term earnings growth,” he added.

Eastman has a target to deliver core 10-15% earnings per share growth in 2015 versus 2014, Costa noted.

Eastman’s strong statement in favour of diversity comes on the heels of activist investor pressure on large diversified chemical companies such as DuPont and Dow Chemical to split into parts.

On 17 September, Trian Partners, led by activist investor Nelson Peltz, released a letter to US-based DuPont management calling for a split into two companies.

On 18 September, Germany-based Bayer announced it will spin off its €11bn MaterialScience business in 12-18 months.

PORTFOLIO MOVES
Eastman has made a number of major portfolio moves over the years to transform into a specialty chemicals business.

In 2011, it divested its US polyethylene terephthalate (PET) business, perhaps the last major step away from commodities after selling off its non-US PET assets in 2006.

Its acquisition of US-based specialty chemicals and materials firm Solutia for $4.8bn in July 2012 brought access to new markets such as architectural and automotive films, and rubber additives, and enhanced vertical integration.

In June 2014, Eastman completed the acquisition of BP’s global aviation turbine oil business, adding about $100m in annual revenues to its specialty fluids and intermediates segment.

Earlier in March 2014, Eastman agreed to acquire US-based Commonwealth Laminating & Coating, a producer of window films and specialty films, also adding $100m in annual sales.

“We are probably done with large M&A for the moment. We are focused on getting Taminco closed and integrated, and then will focus on paying down debt,” said Costa. “We would consider smaller bolt-on deals but they would have to be very strategic.”

And the acetate cigarette filter tow unit – periodically a candidate mentioned by analysts for potential divestiture – is here to stay with Eastman, he said.

“It’s a great business and we’ll definitely keep it. Even as demand growth has slowed in China, it is stable,” said Costa. “It’s a great set of assets with strong cost positions that generate stable earnings and cash flow.”

INNOVATION
Going forward, Costa emphasises the importance of innovation, whether in cellulosics, polyesters, olefins, rubber additives, plasticizers or amines in the future.

“For Eastman, it’s all about innovation in building world-class technology platforms. We must accelerate this and differentiate in our core applications. That’s how we’re going to deal with competition, especially from Asia, in the next five years,” said Costa.