News Focus: Solvay adjusts for Europe challenges

07 March 2014 10:51 Source:ICIS Chemical Business

Through joint venturing its chlorvinyl assets, it will control exposure to Europe’s high energy prices and slow-growth market

Belgium’s Solvay is tackling the long-term, structural challenges facing European petrochemicals by trying to cut exposure to some upstream commodities that are impacted by high energy and feedstock prices, and focusing resources instead on service or value-added specialties.

Speaking to journalists after the publication of its fourth quarter financial results in February, CEO Jean-Pierre Clamadieu said: “Europe has high energy prices, low-to-no growth and a restructuring chemicals industry. We want to restructure to focus where the energy impact is minimised. This means value-added products targeting low cyclicality.”

Solvay HQ plans strategy to combat Europe’s many challenges

Copyright: Solvay

A key part of this has been Solvay’s move to put its chlor alkali assets into a joint venture (JV) with INEOS, with the aim of exiting th e JV in a few years’ time.

The company has now offered to divest certain polyvinyl chloride (PVC) businesses rather than placing them into its proposed JV with INEOS to satisfy competition authorities. It expects a decision from the European Commission by the beginning of May.

The joint venture – announced in 2013 – proposes to combine Solvay and INEOS’s European PVC assets. But the deal, which would merge productions assets of the region’s top two producers, was referred to Commission investigators because of concerns over competition.

Clamadieu said that Solvay is committed to the JV, and is answering the Commission’s concerns as it negotiates the deal . However, he insisted that the JV must be of a size to survive amid the pressures the European PVC sector faces such as high energy prices compared to other regions and a slow-growth market.

He said: “This is under review with the EU and we expect a decision from the Commission by early May. We’re very committed to finding answers to their questions. We need to make sure we have a JV which flies with a reasonable parameter of activity. It’s a very challenged market under a lot of pressure.”

He added: “We are merging number one and two in the market so we expected questions to be asked. We would look at divesting some businesses rather than putting them into the JV as a remedy.”

On 28 February Solvay published a press release stating that it would put forward a remedy package to the European Commission. PVC plants currently owned by INEOS at Schkopau (Germany), Beek (The Netherlands) and Mazingarbe (France) along with chlor-alkali, ethylene dichloride (EDC) and vinyl chloride monomer (VCM) assets at Tessenderlo (Belgium) would be sold.

“These facilities are all currently operated by INEOS and are strategically important within the European chemicals sector. They have the ability to compete as successful stand-alone businesses under third party ownership,” said the two companies in a joint press statement.

In the meantime the plants will all operate normally, said a spokesperson from the joint venture.

“We came up with this proposal after an improved understanding of what the Commission wanted, as a consequence of the Phase II investigation it undertook,” the spokesperson said, adding that the final decision by the Commission is expected by the middle of May at the latest.

Solvay’s strategy in Europe is to progressively reduce exposure to the PVC chain. “We want to act responsibly so we’re building a JV first which can resist the challenges from the rest of the world, especially North America. Then we plan to exit in a few years.”

Chief financial officer, Karim Hajjar, pointed out that Solvay’s PVC operation in Europe generates more than €100m in cash flow.

Clamadieu added: “So it is not bleeding cash; it’s just part of our strategic move. We think in the long term it faces challenges.”

Solvay is divesting its Brazil-based Latin American PVC operation to Braskem and is working to close that transaction. “In Brazil energy is very expensive and we face US imports. We also have a weak position versus Braskem,” said Clamadieu.

But the company remains committed to PVC in Asia where it has a plant in Thailand. Clamadieu said Asia is in a much 
better position and has a dynamic market.

It is also retaining its RusVinyl project with Russia’s Sibur which, said Clamadieu, has privileged access to energy.

“We’re taking a pragmatic approach – there is no urgency to divest as long as they are profitable and contribute to group performance,” he added.

Like most of its peers, Solvay is trying to enhance exposure to faster-growing markets. The rebalancing away from Europe is continuing with 2013 pro-forma net sales declining 9% in Europe while other regions enjoyed single-figure growth. Its acquisition of US oil and gas chemicals group, Chemlogics, is giving the group more access to the growth derived from US shale gas.

Clamadieu said: “People underestimate the change in global energy caused by US shale gas: it has changed the situation completely.”

He is pushing the company to grow in Asia despite its high energy costs because of growth prospects; and in North America which is benefitting from new natural gas supplies. “Latin America is on the side of the game with countries like Brazil suffering from high energy prices.”

In a presentation to journalists he highlighted three main elements to the company’s growth strategy: portfolio management; a transformation programme aimed at boosting efficiency in manufacturing, supply chain and energy use; and a focus on corporate culture.

On portfolio management, Clamadieu picked out two key growth engines of Advanced Formulations and Advanced Materials where investment will be focused.

Advanced Materials includes products such as specialty polymers, silica and rare earths. Solvay believes these products have high entry barriers and high returns on investment.

Advanced Formulations focuses on formulations which manage the interface between solids and liquids from personal care to oil, gas and agrochemicals. This is the former consumer chemicals division which was rechristened following the acquisition of Chemlogics.

This is an innovation-driven part of the company with low capital intensity.

The other side of the portfolio are cash generators such as soda ash, and emerging biochemicals, as well as polyamides and the chlorvinyls business.

“Ideally we’d like two thirds of our businesses to be growth engines and the rest, sustainable cash generators – today just over half are growth engines. In polyamides are short term aim is to improve its performance then we’ll examine our options. We’ve had a big improvement in engineering plastics but we’re still facing a lot of pressure [from upstream plants] and we’re asking our JV partners what we can do to improve our position.”

Solvay is examining its options its EcoServices business, focused on US sulphuric acid. “We’re looking at disposal. It’s a sustainable cash generator and we’re under no pressure to sell. We want to decrease the complexity of the organisation and to focus on our growth engines.”

Clamadieu said the group is finding ways of transforming the company beyond portfolio management. “We have an energy task force which goes from one site to another and in any plant can identify 8-12% of energy savings with a three year payback. It’s a good example of doing better with what we have.”

Together with production programmes focused on the soda ash and polyamide businesses, Solvay aims to boost profitability by €670m by the end of 2016.

Clamadieu said: “We’re implementing a very decentralised management structure as we can’t possibly manage it all from Brussels. Teams are empowered through 15 global business units which are given the power and ability to make decisions.”

These global business units (GBUs) are headquartered all over the world. Teams are given parameters, but decisions are made by the teams. “We want to push this close to the field. We focus on the ability to make quick decisions and to make changes. Also to give people the chance to grow within the business. Change takes many years but momentum is growing.”

Solvay suffered declines in sales, operating and new profits in 2013, with recurring earnings before tax, depreciation and amortisation (REBITDA) falling 12% to €1.66bn. For 2014, Clamadieu said: “We’re starting to see some positive signs in our discussions with customers and have some confidence that we can increase REBITDA, with growth on top of the Chemlogics acquisition.

According to executive board member, Jacques van Rijckevorsel, the next generation of its solar-powered plane will be unveiled on 9 April at Payerne, close to Lausanne in Switzerland. This craft - with a wingspan of 72 metres compared with 63 for the first one, will fly around the world in stages with around 25 days of flying time spread over five to six months. “It is not a toy, it is a flying laboratory,” he said, pointing out that battery technology from the first Solar Impulse is already in use in mobile phones. Solvay is a major sponsor.

By Will Beacham