We follow up the Orbiavinyls strategic review announcement with a broad overview of the PVC market and our view of potentially interested parties.
We highlight and discuss two notable chemical plant outages in the news this week: 1) Sasol LDPE at Lake Charles, LA; and 2) IQOXE EO in Spain.
Orbia, formerly called Mexichem, publicly announced last week that its vinyl business was under strategic review – see LINK to the company notice that followed a Bloomberg news release and see ICIS follow-up note in LINK from earlier this week. Our discussions tend to point to what is noted in the ICIS article, which we think is the consensus view: Westlake, Ineos and PE firm Apollo are likely the most interested parties. We see the general case for the Orbia combination with Westlake (further expands its presence outside of US and into Mexico and South America, and adds to its already sizable specialty PVC business) and Ineos (boosts, probably too much, its already high market share position in Europe, adds some exposure North and South America, and adds to its specialty PVC market position), we dig a bit deeper today to lay out the case for potential interest in Orbia on simply a geographic exposure and specialty PVC market share basis. In our view, the news issued by Orbia last week likely signals its attempt to open the business up to more potential buyers, as we think they could have received pushback at the estimated valuation at a premium to ~7x trailing 3Q19 LTM EBITDA if the data in the ICIS report noted above is accurate. So, to start let’s take a look at the Mexichem/Orbia business – see its presentation in [LINK] and also see this global chlorine and building products (CBP) report in [LINK] for reference. Now, let’s look at geographic exposure and the PVC market overall. To start, see page 26 of the CBP report, we find that Mexichem/Orbia held only a ~3% share of the US PVC market in 2018, and this compares to a ~28% share held by Westlake and no exposure for Ineos in North and South America – see facility map in LINK. But, when we turn to Europe the tables turn and Ineos holds the highest market share [see page 28 in the CBP report], and we find Mexichem/Orbia and Westlake hold smaller market shares in this region. All together, we see the geographic mix and production asset foot-print rings in favor of Westlake (and a few others) relative to Ineos. Now, there is another piece to the puzzle, and it is displayed on slide 15 and 16 of the Mexichem/Orbia presentation in LINK as it shows the “specialty” PVC market by share position. The item that notably stands out to us is the high current market share positions of both Mexichem/Orbia and Westlake, and the lower market share position for Ineos among many other competitors. We see this as a bit of a market share grab, and we can make the case for Westlake (slides 10 and 11 in its presentation discusses its specialty PVC exposure – see LINK), Ineos and other peer interest. Potential regulatory issues could arise for Westlake as a result of its notably high market share position in specialty PVC exposure, but we see this as manageable through a bit of asset shedding. So, when we put our views of geography and fit together, we see Westlake as the most logical partner with Mexichem/Orbia. But, we also want to stress that a case can be made for multiple other combinations (Ineos, Shintech, St. Gobain, etc.), and we suspect that the announcement of a strategic review from Mexichem/Orbia suggests it is opening up the market for bidding, and we think most recognize a positive PVC business cycle likely lies ahead of the industry. On top of this, we think PVC market players recognize that the market share positions currently held by Mexichem/Orbia will be difficult to capture organically at a decent ROI if the assets picked up by a peer; especially, if the Mexichem/Orbia assets are lost to a lower cost/integrated competitor (both in upstream chlor-alkali and ethylene) with now more fortified positions in a number of key specialty PVC markets post the transaction. We think commentary on this topic with come forth with upcoming 4Q reports – we will provide updates as we receive them. We also plan to meet with an Asia PVC producer for lunch early next week in Houston, TX and will offer our perspectives following this event. Lastly, we think that this business should be a bridge too far for Private Equity, despite significant cash on hand at many firms. The lack of synergies and cyclical risk make this a difficult acquisition to justify. Private Equity has had mixed results with PVC assets in Europe. Westlake, Ineos and a couple of others are much more logical buyers of this business than Private Equity, and if they are out-bid by private equity the bid will be too high.
Other chemical industry items worthy of note:
Sasol experienced a fire/explosion earlier this week as it was commissioning new low density polyethylene (LDPE) capacity – see LINK. Its ethylene cracker and other derivatives, such as the LLDPE and EG production were not impacted. We view this as a plus for LDPE contract price support in January, but we do see it as a negative for US spot ethylene values as the cracker is still operating. US PE spot prices bounced higher in early 2020, and we find producers debating whether the market is tight enough to support a portion of the US$0.04/lb proposed contract uptick MoM for January – see PlasticsExchange report in LINK that discuss this issue. We think the Sasol upset adds to the producer case for price support in January LDPE contract values. Westlake, Dow Chemical, Lyondellbasell, CP Chem and ExxonMobil are sizable LDPE players.
A number of articles hit overnight discussing an explosion at an ethylene oxide (EO) plant in Spain – see Platts report in LINK and ICIS report in LINK. BASF, Dow Chemical, Covestro and Repsol operate facilities in the Tarragona chemicals park that were near the explosion at the EO plant that is operated by Industrias Quimicas de Oxido de Etileno (IQOXE). Per the ICIS report, BASF has already commented to unaffected operations in the area, and at this time we suspect little impact to peer production in the area. We think that the explosion could help modestly tighten the EO market, which is a bit of a plus for integrated players such as BASF and Dow. See write up on the European EO industry in LINK that discusses market size and derivatives. As we gather further news/insight into the impact, we will provide updates.