Surfactants Monthly Review – July 2017
From Coatzacoalcos to the Cantons..
This month we look again at the issue of freedom in our markets. The blog asks the question; can Pemex of Mexico teach Clariant of Switzerland, something on this subject. Mere months ago, this questions would seem preposterous. Today, I’m not so sure. Read on…
This month’s first piece is pulled from the an article by the excellent Al Greenwood in ICIS Chemical business and is one which I have waited a long time to read. All comments in bold are mine. Reality finally comes to the Mexican EO Market! In another outstanding analysis, Al writes that Mexican state producer Pemex completed an electronic auction to award supplies of ethylene oxide (EO) to customers in the country. Pemex said 10 businesses participated in the auction. Pemex did not disclose any prices, but said that it was at a level that balanced supply and demand (Wait, what!? Price settles at a level that balances supply and demand? What heresy is this?) Moreover, it exceeded the historical price (surprise!). Pemex called the auction a success (Duh..) and said that it left behind the previous cumbersome practice of allocating volumes and prices by the state producer (sweet unexpected words..) This will allow for the encouragement of competition and the strengthening of the market," Pemex said in Spanish (It sounds pretty sweet in English too..). The auction is in line with the best international prices and will allow for the exploration of alternatives to increase the availability and supply (wait a sec, someone’s been reading Adam Smith – in a plain brown wrapper most likely) of EO to the petrochemical industry in Mexico, the company said. The auction guaranteed an adequate price to the conditions of the market. Pemex did not elaborate on those market conditions. There’s more by Al on this subject on the ICIS News site which I encourage you to read.
As someone who has toiled in the barren vineyards of the (now former) Soviet style Mexican EO market, this news is incredible and encouraging. No longer will producers have to line up, like so many Oliver Twists. This limited commodity (on why it is so limited you have to read the rest of Greenwood’s article) is sold in the free market to those companies to whom it is most valuable. And such a marketing exercise is said, by the producer, to lead to increased supply. Welcome to the 21st Century, Pemex. What a concept. I wonder if it could be applied in other areas in the USA where we seem to have problems with supply.. I digress.. back to the surfactants news.
Speaking of the free market, Investment bank, Bernstein, as reported by ICIS, has opined on recent events involving three companies which have a strong presence in the surfactants market. A recent shutdown is expected to weigh down on second-quarter results for Swiss-based Clariant while a force majeure at Evonik may do the same, according to Bernstein Research. According to Bernstein, maintenance shutdowns at Clariant, which is expected to announce its results on 27 July, will “hurt” second-quarter EBITDA to the tune of approximately Swiss francs (Swfr)10m ($9.7m). A combination of the above and ramp-up costs associated with Clariant’s ethoxylation plant in the US “could lead to a consensus miss in Care Chemicals”, said Bernstein. “Trends in the remaining divisions are unchanged from 1Q and the company will likely confirm FY guidance for ... growth and higher profitability. We agree on the former but doubt the latter.” Elsewhere, with regards to German firm Evonik, Bernstein is of the opinion that consensus may not have included the force majeure in performance materials, which amounted to €20m EBITDA. UK-headquartered specialty chemicals firm Croda, which announces its results for the second quarter on 25 July, will see organic sales growth of 3.8% year on year, well below the 4.9% posted in the first quarter, Bernstein said. “Performance Tech (PT) will outgrow the other divisions on the back of a cyclically strong quarter. Margins in Personal Care should be strong (distributor exit, NPP growth), whereas PT will see a soft mix in Oil & Gas.”
Joe Chang, ICB’s Editor in Chief wrote a nice article on Nexeo which actually picked up on many of the themes the company discussed at our 6th World Surfactants Conference in New York in 2016. Nexeo Solutions is “redefining the role of distribution” in the chemical industry to operate as a “true brand extension” of its suppliers, its president and CEO David Bradley told Joe. Digitisation is playing a large role in this transformation, providing suppliers what Bradley calls “unprecedented transparency” through viewing data on the company’s centralised platform. Bolstered by this capability, Nexeo Solutions has secured a number of supplier deals this year.
In April 2017, Nexeo became an authorised distributor of Solvay’s AEROSOL sulfosuccinate surfactants in the US and Canada (remember these classic old Cytec, formerly, American Cyanamid, surfactants). These are used in emulsion polymer (EP) synthesis, paints, over print varnishes (OPV), inks, adhesives, agrochemicals and plastics - and occasionally, apparently in duck ponds...
In March 2017, Nexeo became Ele Corp’s exclusive distributor for the personal care market in the Midwest region of the US. Ele produces specialty chemicals and intermediates for a wide range of end markets, including personal care. In February, Nexeo picked up an exclusive rights from Colonial Chemical to distribute its specialty surfactants for the personal care market in the northeast US, and became the channel-to-market for Solvay’s Rhodoline Defoamer product line in the US, Canada and Mexico.
Nexeo took a major step in its evolution with the acquisition of Mexico-based specialty chemical distributor Ultra Chem in April 2017. Ultra Chem had $56.9m in sales in 2015, as listed in the ICIS Top 100 Chemical Distributors, with major end markets in paints and coatings, food and beverage, home care, inks and adhesives, personal care, plastics, polyurethanes for flexible foam and textile and tannery, along with industrial areas. The deal marks Nexeo’s entry into Mexico’s chemical distribution market. It already has a presence in plastics distribution in the country. “Ultra Chem is a natural extension of our North American specialty chemicals business. It has double-digit EBITDA (earnings before interest, tax, depreciation and amortisation) margins and is growing at double-digit rates,” said Bradley. “The cultural fit has been strong and it opens up markets in Mexico and can serve as a gateway to growth in Latin America,” he added.
Another quarter for Stepan ends June 31st, with sales up by 9% year on year to $495m, led by a 14% increase in selling prices, partially offset by a 4% decline in volumes and negative foreign currency impacts.The higher selling prices were attributable to the pass-through of certain higher raw material costs. Net income for the three months ended 30 June fell 2% to $27.9m and total operating income fell 9% to $38.9m, led by a sharp profit decline in Stepan’s polymer segment which saw rising raw material costs and increased competitive pressure, the company said.
Second-quarter gross profit fell to $90m, from nearly $93m in the 2016 second quarter, with the gross profit margin as a percentage of sales down to 18.2%, from 20.4%, as cost of sales rose at a faster pace than sales. In Stepan’s surfactants segment, second-quarter operating income was $31m, up from $27.2m in the 2016 second quarter, primarily due to higher demand for functional products and strength in household, industrial and institutional end markets. The segment also benefited from lower manufacturing costs because of previous plant closures in Canada and Brazil. Overall surfactants sales volume declined 3% from the prior-year period, primarily due to lower commodity surfactant demand.
More earnings news: Huntsman is bringing down its ethylene oxide/ethylene glycol (EO/EG) facility in Port Neches, Texas, for a planned turnaround in the current third quarter, an official said in an update during the company’s second-quarter earnings call on Thursday. Huntsman has 580,000 tonnes/year of EO capacity at Port Neches and 255,000 tonnes/year of EG capacity, according to the ICIS plants and projects database. The maintenance occurs once every four years, with the 2017 round to last about two months, the company had said previously. The turnaround is currently expected to result in a negative earnings before interest, tax, depreciation and amortisation (EBITDA) impact of $15m-20m in Huntsman's performance products segment in the third quarter, the official said on Thursday. However, even with this negative, Q3 performance products results are expected to exceed Q3 2016 results, he added. In the second quarter, performance products revenues fell by 1% year on year to $561m but adjusted EBITDA rose by 19% to $102m. The year-on-year sales decrease in the performance products segment for the three months ended June 30 was mainly driven by lower sales volumes due to the sale of Huntsman’s European surfactants business to Innospec last year. The decline was partially offset by higher sales volumes in the remaining businesses, as well as higher average selling prices.
ICIS’s immensely talented Yeow Pei Lin continues to write outstanding analysis of the China chemicals markets. Late July, she wrote an excellent piece on the Chinese ethylene market, which I encourage you to read in it’s entirety. A couple of snippets here: Lin mentions that downstream conditions in China have improved since May, giving further impetus to end users to ramp up production. The Chinese ethylene oxide (EO) sector outperformed other downstream markets in the second quarter due to turnarounds at the facilities of a few key domestic producers.
More on the Huntsman / Clariant Soap Opera. According to Jonathan Lopex, writing in ICIS, Clariant is actively engaging with activist investors who are sceptical (just like the rest of us) about the company’s plans to merge with US chemical peer Huntsman as more synergies are quantified in the negotiations taking place. Clariant’s CEO, Hariolf Kottmann, said dialogue with White Tale, an investment fund which represents shareholders with a recently increased stake at the company of 10%, is “positive and constructive” and expressed confidence it would get on board the merger plans. The two chemical companies announced in May their intention to merge in an all-stock deal which would create an entity with annual sales of around $20bn, to be called (somewhat unimaginatively) HuntsmanClariant. According to Kottmann, the plans to merge both companies are in full swing: weekly meetings are being held in the US or Europe and more than 100 people from each company are working on the transaction. “We have a new investor with 10.06% of [the company’s] shares and we take this investor seriously, like any other investor who may hold a 5%, a 3% or a 1% stake,” said the CEO. “And we have established a positive and constructive dialogue with these investors.” Kottmann's peer at Huntsman, Peter Huntsman, said on 27 July there was "virtual unanimous agreement" among shareholders to go ahead with the merger, showing confidence the deal would close in December or January. White Tale has previously essentially accused Clariant and Huntsman of "falling into each other's arms" to avoid takeover by a bigger, meaner company, like Evonik.
According to some European chemical analysts, White Tale increased its stake to over 10% earlier this month in order to have a say in Clariant’s decision-making processes. The fund believes that a higher return would be achieved from a direct of sale Clariant to an interested buyer rather than a merger with Huntsman. Kottmann denied HuntsmanClariant would become more of a commodity-based chemical company, instead of the specialty chemicals player Clariant has for years been aiming to become. The CEO said that while some commodity-based divisions post-merger – mostly, Clariant’s plastics and coatings and Huntsman’s textiles effects – would account for 25% of the business, the remaining 75% would come from divisions set to greatly increase profit margins. “The new portfolio, if organised and structured well, and if the business is well understood, will have a 25% of business managed [to obtain healthy] cash flows and 75% to obtain growth in profit margins,” said Kottmann. Among the more specialty divisions post merger, he mentioned catalysis, advanced materials, performance products, care chemicals (includes surfactants), polyurethanes (PU) and natural resources, which serves the mining and oil and gas production processes. “Before you criticise something, you have to structure [the new entity] and go into the details. It’s not true we are coming back to a commodity-based business. In our current portfolio we have commodity products as well. “If you analyse the value chain form ethylene via ethylene oxide [EO], downstream and into specialities, the first part of the value chain is pure commodity.” Analysts have also highlighted how the initial $400m/year synergies first contemplated would not go far enough, which prompted the two companies to embark on campaigns to convince investors and analysts the figure could go higher once negotiations started. In May, Clariant’s CFO Patrick Jany said in an interview with ICIS that the figure would grow once the two companies’ teams met to analyse potential savings and synergy measures, as well as potential growth in combined sales. Jany said this week the $400m/year in synergies would be implemented “the day after the merger” and added that the two companies now expected an additional $25m/year in tax savings and growth of around 2%/year. He added that the two firms had come to the conclusion that, post merger, the EBITDA margin would stand at 20% (not bad).
So in summary what Clariant seems to be saying is that i) The company was more commodity to begin with than you thought and ii) the synergies (i.e. layoffs and other cost measures) are bigger than we first let on. Both fair points and if 20% EBITDA post merge is really what it’s going to be – good for them. However, why not take a leaf from Pemex’s book and let the market figure out what the real value of Clariant is? I think that is what White Tale is saying. Fair point also.
To wrap up, it seems right to have a Rush video. As if we need a reason: Rush wrote a lot about freedom and the struggle of the individual against statist oppression. Many of their songs, to me at least, can be taken as paeans to the free market. This one, originally part of 2112, is taken from the 1976 live album, All the Word’s a Stage. (You don't get) Something for Nothing.
That’s if for July’s blog. There will be no blog for August as your correspondent will take some time off. We will next see each other most likely in Amsterdam or Mumbai as the fall season of surfactants conferences kicks off. See you then.