Coronavirus, strikes frustrate global economic rebound in Q1 – Arkema CEO

PARIS (ICIS)–No recovery is currently in sight for the global economy, according to the CEO at French chemicals major Arkema, with tentative economic gains at the start of the year arrested by industrial action in some countries and the coronavirus outbreak spreading across the globe.

“I would say, from the macro standpoint, we really are in a continuation of the last [quarter], if you count [industrial action and coronavirus],” he said.

“This means we don’t see any recovery yet at the start of the year … Germany is not good, Italy is difficult to talk about because of the virus, France is okay, not really growing, but okay,” he added, noting that the key electronics and transportation sectors remain depressed.

The US economy remains solid and, while much of Asia has been hit by the slowdown in China as the coronavirus outbreak exacerbates the impact of the country’s trade war with the US, southeast Asia demand remains solid, he added.

The company posted a 1.2% decline in 2019 full-year earnings before interest, taxes, depreciation and amortisation (EBITDA), a modest dip but less pronounced than many of its peers, as its presence in the adhesives sector continues to grow with the acquisition of Lambson and LIP.

Le Henaff declined to comment on reports that the company is preparing a large-scale divestment out of its remaining intermediates assets to forestall pressure from activist Elliott Management, which is reportedly building up a position in the company, but such a move would not be a radical departure for the company.

Since the 2014 acquisition of Bostik, which formed the lynchpin of Arkema’s adhesives growth strategy, the company has pushed away from commoditised and intermediate chemicals towards less cyclic materials.

Arkema’s target of 80% of revenues from specialties by 2023 – from 72% on a financial reporting basis and 75% on a pro-forma basis for 2019 – can be met with divestments as well as acquisitions.

Some of the company’s prominent remaining intermediates operations include its polymethyl methacrylate (PMMA) business, which netted rival Evonik a significant payday when it sold down its operations in the sector last year, and fluorochemicals, which remains depressed due to alleged dumping in Europe and North America.

While the lengthy chill in global trading has weighed on valuations, price tags for large competitive chemicals operations remain attractive to private equity, and the PMMA business could fetch a competitive price, and be a headline-grabbing sale for a company that has concentrated for the last half-decade on small to low mid-cap purchases.

Despite the current speculation, and a new long-term strategy announcement expected in early April, the company is on track to reach the 80% simply by continuing that current approach, Le Henaff added.

“On a pro-forma basis, including the full effect from ArrMaz, the bolt-on acquisitions,  and the disposal of functional polyolefins… we are already at 75%,” he said. “[Arkema could reach] the 80% in 2023 by continuing only bolt-in type acquisitions mostly in adhesive, we are there. It does not need any disruption,” he said.

The company’s unshowy, methodical growth and realignment strategy belies the fact that it has grown its earnings for years up to 2018 and remained stable in 2019 in the face of much stronger contractions for other European players. Yet its share price remains relatively subdued, a fact Le Henaff acknowledges.

“Today the value of the shares has gone up from €1.7bn [in market cap when the company listed] to around €7bn, which overpassed nearly any peers. [But] there is upside potential because we recognise that there is a potential for the share value which does not reflect the quality of the assets,” he said.

The company’ strategy of balancing its geographic focus into three equal pillars and reducing intermediates to a fifth of its revenues will end up buoying its share price eventually, he added.

“There is an upside, and by continuing to implement the strategy of transformation, we will certainly get [to that] at a certain time,” he added.

Last year also saw the acquisition of the 50% stake it did not already own in China acrylic acid join venture Taixing Sunke Chemicals, after electing in 2016 not to exercise an option to purchase the interest.

At the time, the financial terms of the stake purchase option did not reflect the value of the acrylic acid in China, the company said in 2016, but an attractive price and the chance to assume full control of the business could position the facility as a launch pad to develop its presence in the sector.

“We decided at a certain point that to remain a 50% actor with a Chinese partner in this JV was difficult to manage,” Le Henaff said. “We had this opportunity because the economics were more challenging for this unit [and presented] an opportunity to buy the remaining part for a very attractive price.”

It’s like an implementation of capacity, which is very attractive for us. Now we consider that to be a starting point, which means that we know the strength of the site is its competitiveness but the weakness of the site is its lack of integration,” he added.

China and wider Asia Pacific remain a priority for the company despite the €20m impact of the coronavirus outbreak in China on company earnings so far this year, with polyamide 12 (PA12) and polyvinylidene fluoride (PVDF) capacity expansions expected in China and additional thiochemicals output in Malaysia.

The company remains vigilant of the supply chain impacts of the virus on its China operations, but the impact carries far beyond the country’s borders, even when leaving aside outbreaks elsewhere.

“Customers can be in China, in Asia … They might not have the virus problems but the whole supply chain [is affected], everyone is interconnected. It has lots of repercussions,” Le Henaff added.

Front page picture source: Arkema

Interview article by Tom Brown