Market reaction mixed to Commission approval for INEOS/Solvay JV

Focus article by Heidi Finch.

LONDON (ICIS)–Feelings are mixed in the chlorvinyls market regarding the European Commission’s decision to approve the INEOS/Solvay chlorvinyls joint venture, pending the sale of certain assets, industry sources said on Friday.

One vinyls producer said that market consolidation is necessary, as there are too many players and no real profitability in the industry, so it considers the merger of Solvay and INEOS’ chlorvinyls operations into a single entity a move in the ”right direction”.

The same source, however, did not predict that the deal will necessarily lead to less competition, particularly in view of the Commission’s proviso that a new buyer is found for the assets earmarked for divestment. Offered up by the companies as part of their negotiations with EU competition authorities, the venture cannot be finalised until a binding agreement with a buyer for the assets is signed.

The Comission’s conditions for approval mean that the deal will not mean a reduction in the overall number of assets, provided that a buyer is found, the source added.

Commission clearance is subject to the divestment of INEOS assets including polyvinyl chloride (PVC) plants at Mazingarbe, France, Beek, the Netherlands, PVC and vinyl chloride monomer (VCM) plants in Wilhemshaven, Germany, along with upstream chlorine and ethylene dichloride (EDC) assets in Runcorn, the UK, and chlorine and EDC, vinyl chloride monomer (VCM) plants in Tessenderlo, Belgium.

The Commission also stipulated that the buyer will also enter into a joint venture agreement with the companies for the production of chlorine at Runcorn.  

Some market players speculated that the merger may be a catalyst for possible production losses in the industry, despite the sale of the asset portfolio.

They consider that the smaller, less profitable plants or units in the wider market that may not have been converted to membrane technology, will not be able to compete against what is still perceived to be a strong joint venture entity, which could accelerate the market consolidation process.

Sellers may see this as an opportunity to remove some volume from a structurally oversupplied chlorvinyls market, particularly in northwest Europe, which could help them to address low pricing levels, especially for caustic soda. The latter materal has seen significant price erosion on quarterly contracts over the last year.

Chloralkali and vinyls buyers, however, remain concerned that the market consolidation process, which has been initiated at least in theory by the approval of the JV, will leave them with fewer supplier options and therefore less negotiating power in price discussions. One vinyls customer predicted that the merger is likely to “push buyers into a corner”.

A vinyls buyer added that INEOS’ option to buy out Solvay in the four to six years following the formation of the JV would strengthen the company’s position in Europe and could stand to limit buyers’ leverage in price discussions and the overall market.

A few chlorvinyl buyers speculated that the JV – if completed – could be more cost effective for the industry in theory, particularly in light of INEOS ChlorVinyls’ access to cheaper feedstocks from the US, but added that it remains to be seen if these benefits will be felt downstream.

Some players noted a question mark over who can afford and would be prepared to invest in the assets earmarked for divestment, particularly in view of relatively non-existent margins in the chlorvinyls industry and ongoing regulatory pressure to convert any remaining mercury cells to membrane for legislative reasons by December 2017.   

One trader said that while the assets and locations of the assets in the divestment package are not bad ones, particularly as they collectively present an integrated package,  it does not change the fact that “it will be a big investment in products which don’t bring back any money.”

One vinyls producer stated that the assets up for divestment will need to be competitively priced to incentivise any buying interest, in light of the profitability concerns in the industry and in order to facilitate a quick sale. The joint venture deal is expected to be completed by the fourth quarter of the year, according to Solvay, and cannot complete until a buyer has been found.