Emery Oleochemicals to sell Europe commodities as it refocuses

Source: ICIS News

2015/04/22

US Williams begins manufacturing ethylene for sale at GeismarLONDON (ICIS)--Malaysia’s Emery Oleochemicals is seeking to sell its Europe-based commodity chemicals plant, expand other sites, and seek acquisitions as it drives forward its transformation from commodities into a specialties-based producer.

Volatility caused by global overcapacity and increasing competition from Indonesia and China means that a non-integrated producer such as Emery Oleochemicals cannot compete effectively in commodities outside of the US, according to the group’s new CEO, Ramesh Kana.

He said: “In Europe the cheapest palm oil in the world is on sale. We are unlikely to invest more in our 250,000 tonnes/year Dusseldorf site and are in the process of selling it.  I can’t manage the volatility of that business. In the last two to three years there has been a big change in the market emanating from Indonesia.”

Kana explained that the Indonesian government put a tax on exports of crude palm oil to encourage a value-added industry to develop. In response, a lot of plants were set up and the production is now exported to Europe. He expects oversupply of fatty acids to last for seven years, and 10 years for fatty alcohols.

“These plants can be operated in an unpredictable way. Because they are integrated plants they can play the market, introducing a lot of volatility and irrational pricing. Emery is not integrated so we cannot cope as this is a low-margin business. The site would benefit someone who is integrated and use it as a swing plant.”

For non-core, commoditised businesses such as those serving home and personal care, Emery plans to spin them out into joint ventures to someone with a competitive advantage, or possibly involving private equity groups as a way to return shareholder value.

Emery’s specialty businesses enjoy profit margins of 15-20% compared to around 3-5% in commodities.

“Our strategy is to move from commodities to specialties: you need scale to keep costs down and you need feedstock integration.”

CORE BUSINESS GROWTH STRATEGY
Kana wants to expand Emery Oleochemicals’ plastic additives and bio-lubricants businesses as he drives forward a plan which should see the current 40/60 split between specialties/commodities reverse to be more like 60% specialties within a year.

“Emery can’t become a leader in the five segments in which we operate so we will focus on two.  Time and money will be invested here, where we already have long-standing customer relationships and proprietary technology going back 40 years.”

At Loxsted in north Germany, a specialty bio-lubricants plant came onstream in the third quarter of 2014 and Kana is already planning to debottleneck that plant, with a decision expected within the next two months. He is also considering options for a bio-lubricants plant is Asia as that market is growing in double-digit figures.

Longer-term the company – a 50:50 joint venture between PTT Chemical International and Sime Darby Plantations - is also planning to launch an oilfield chemicals segment to take advantage of growth in shale and conventional oil production. Emery already supplies Halliburton with these products in what Kana describes as a very proprietary business where each customer has a different formulation.

“Drilling will continue despite the oil price drop and companies are seeking to replace the use of conventional products. Our product is 97% natural. We are working with a company which provides carbon nanotubes which can be blended at 2% or less to change the viscosity of our ingredients for drilling muds.”

Emery is conducting trial runs with a big oil exploration company within the next six months following lab tests which went phenomenally well, according to Kana.

He insists the company is not seeing a huge impact from the oil price drop: “It is difficult to swap back to petrochemical-based products and most of them don’t want to turn back the clock. However it is increasing pricing pressure.”

ACQUISITIONS
The group is on the acquisition trail, seeking inorganic growth in the US or Europe in plastic additives, biolubricants and eco-polyols: “We need to supercharge plastic additives and bio-lubricants with non-organic growth though we are not close at all to a deal.”

The focus will be on adding competencies and technology rather than growing market share. We want to grow in. Home and personal care is closely linked to the commodities business so we will decrease our focus there, as well as the agrochemicals sector which is a very niche business.

Kana also wants to expand into Africa in the longer-term as he sees the potential for a lot of competition from palm oil and oleochemicals produced in West Africa.

He said: “In ten years’ time there will be a threat to our markets. There is not a lot of palm oil production in West Africa right now but the microclimate and soil are very suitable for palm oil production. Once they get this going as well as downstream then this will threaten US markets as you just have to cross the Atlantic.

“We are looking at Africa and will start by setting up local partnerships . This would be for biolubricants and plastic additives,” he added.

He thinks downstream customers could also move to Africa if China becomes more expensive for manufacturers. “We will support those industrial sectors such as packaging and plastics manufacture. Africa does not have the scale yet but we need to be there.”

US STRATEGY
Kana says he remains committed to his commodity business in the US. It still makes money because the market is isolated from overcapacity caused by the Indonesian expansions.  “The US commodity business is very strong - it suffers from the tyranny of distance as you can’t take palm oil to the US.”

In September, at its US Cincinnati site, Emery will commission a $60m specialty polyols plant with capacity of 20,000-30,000 tonnes/year. Once this plant starts up, 40% of the existing production at that site will become captive. The plant will be focussed on semi-rigid foams for the automotive sector and will ramp up gradually to full capacity.

He says product accreditation takes around two years in automotive so he will sell to the packaging industry in the meantime which is not as high margin.

At the same site Emery has acquired foam recycling technology from recycling group InfiChem. This is scaling up now as part of the polyols expansion. Mattress foam is cut up and recycled into material for dashboards.

Kana says quantitative easing in Europe has stimulated a real boom in the construction sector as lower interest rates encourage people to invest. Asked about China, he says: “There has been a drop in demand from China but not enough to change my forecasts.”

The CEO is trying to change corporate culture: “Building plants is easy but re-educating our people is more difficult. It’s all about the competence of your people – introducing behaviours to allow them to sell on value rather than price. I have brought in a lot of industry experts who will hold their own against cheap Chinese competition.”

At its head office in Kuala Lumpur, Kana says he has been employing more customer-facing people, and not reducing headcount, as media reports suggest.

He also wants to change customer behaviour along the supply chain: “Big buyers talk a lot about the green value chain and traceability, to ensure there is no felling of mature rainforests. But we want the entire value chain to be more sustainable: just look at the amount of non-recyclable packaging used in consumer goods.”

Interview article by Will Beacham