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Shifting Ground for Synthetics

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Do you need to buy a nonconventional or synthetic base stock? A few years ago, you could get polyalphaolefin from Mobil, Chevron or Amoco. Phosphate esters might be had from Akzo Nobel, Monsanto and Great Lakes Chemical, and for polyisobutene you could try Exxon Chemical. Youd inquire at Union Carbide, BASF or Olin Corp. for polyalkylene glycols, but if you wanted Group III base stocks, you thought about calling Europe.

And if thats your roster of synthetic base stock suppliers, youre long overdue for a new playbook. Just as consolidation thinned the ranks of mineral oil base stock suppliers over the past five years, mergers, acquisitions and spin-offs in the chemical industry have altered the map for unconventional and synthetic lubricant stocks.

That was graphically demonstrated in LubesnGreases Nonconventional Base Stocks Guide, a wall map published with the U.S. edition of last months issue. The map shows the locations and owners of nearly 180 chemical plants worldwide that make the most widely used unconventional base stocks: esters, polyalkylene glycol, polyisobutene, phosphate esters, silicone oils, Group III mineral oils, and polyalpha-and poly internal olefins. Estimated capacities are shown for most plants as well.

I was struck by the fact that there are a lot of plants on the list, but not a lot of company names anymore, remarked Eric Peter, president of Behnke Lubricants in Menomonee Falls, Wis., which makes the Jax line of synthetic industrial lubricants. As Peter pointed out, the supplier list is quite a bit shorter that it was just five years ago. All of the companies named above – and more – were touched by the rapid M&A activity:Mobils PAO now comes from ExxonMobil Chemical.

In 2000, Chevron and Phillips Petroleum pooled their petro-chemical assets – including PAO – in the joint venture Chevron Phillips Chemical.

BP merged with Amoco then dropped Amoco from its name a few years back. This year, it shaped its chemicals and olefins business, including PAO, PIB and esters, into a $12 billion subsidiary called Innovene, which it will soon divest.

Union Carbide in 2000 merged with Dow, which absorbed Union Carbides PAG fluids while keeping the familiar Ucon brand name. Shortly before, Olin Corp. sold its PAG business to BASF and spun off its alkoxylation capacity into Arch Chemicals.

Akzo Nobel last year sold its entire phosphorus chemicals business, including phosphate ester base fluids, Fyrquel hydraulic oils and Syn-O-Ad anti-wear additives, to financial giant Ripplewood Holdings. It has been renamed twice, first as Ripplewood Phosphorus and then as Supresta.

Great Lakes Chemical Corp. on July 1 merged with Crompton and both adopted the name Chemtura. The new $3.7 billion chemical company boasts one of the broadest portfolios of synthetic lube stocks, including esters, phosphate esters, polyalphaolefin and polyalkylene glycol. Chemtura is expected soon to announce what it will keep and what it will divest, and to cut jobs where there are overlaps. How this will play out for its synthetic lubricants is unknown.

Earlier transformations gave us Clariant (merged with Hoechst Specialty Chemicals in 2000), Rhodia (spun off from Rhone Poulenc in 1999), Oleon (sold to private investors by TotalFinaElf in 2000) and Solutia (chipped off from Monsanto in 1997).

And of course, with the emergence of Korean refiners SK Corp. and S-Oil, dominance in API Group III oils has been wrested from Europe. Neither was a merger or spin-off, but rather that greater rarity, a scene-stealing newcomer.

Looking back, none of this shuffling of assets surprises industry analyst Andrew Swanson at Nexant in White Plains, N.Y. Theres always going to be churn, to be turnover of owners in this business, the vice president for chemicals, Americas & Asia, told LubesnGreases. But youll also find that the market shares of the top five or 10 chemical companies in the commodity area have barely changed. Their names have changed, yes, but not the overall market share. Just look at Dow and Union Carbide. With little growth in the commodity and specialty chemical markets, mergers will continue – but wont change the size of the pie overall, he stressed.

For this reason, commodity chemicals have not been very attractive to investors, Swanson noted, and specialty chemicals have not been doing well either, as their material and costs have increased and theyve not been able to show the same returns as before. So even they have had decreased attraction from what they were 10 years ago.

Fewer Choices

Suppliers names are easy to correct in an address book or on purchase orders, say lubricant formulators who are on the buying end of nonconventional base stocks. But other changes are not so easy to digest.

The choice of suppliers is getting narrower, and more plant closures seem to be the result of many mergers, said Ahmed Tahir, global technology manager at synthetic lube manufacturer Anderol in East Hanover, N.J. New chemical plants dont seem to be opening, although there are some [companies] that have expanded or opened up capacity at existing plants.

After a merger, Tahir observed, the new owners often start to look very carefully at their product offerings, and sometimes the chemical company decides to drop a niche product, which consequently can have an effect on our formulation. We may find we have to reformulate because a longstanding supplier decided not to make a particular grade or material anymore.

For example, he went on, with fewer polyglycol suppliers out there today, the product selection can be more limited. Some grades of product may be available from Europe, but not made in the United States anymore – and with the Euros strength right now, it can be very expensive to import. In such cases, reformulating may be the only option – if contracts allow it.

This is why, says Fred Pate, president of Summit Oil in Tyler, Texas, we dont tie the specifications for our compressor fluids to using one specific suppliers fluid, so we can react if theres a disruption or change in raw material supply. Companies which supply factory-fill lubricants dont always have that flexibility, he added, and their contracts may lock them in to a specific raw material from a specific chemical plant.

Part of Kluber Lubrication North America, Summits finished products line include PAO, esters and glycols, and Pate says the company has been largely unaffected by the wave of mergers, because we dont use multiple supply sources and we build relationships and are loyal. We stick to one supplier, and because weve been loyal we earn some credit with them and were taken care of. A greater problem right now, he added, is the rising cost of fluids such as PAO, but decene and ethylene costs are driving that. Its a widespread problem though, so everyones affected fairly equally.

In some cases a companys name may change but little else; Innovenes plants, personnel, brands and products are the same so far, and customers have seen few ripples from the name change. But in other cases, especially in mergers where plant closings and job cuts are expected, the changes are looked on with apprehension. I dont know if I want to sign a contract or confidentiality agreement with them, right now, one East Coast independent, who asked to be anonymous, said of Chemtura. I just dont know who Ill be dealing with there in six months time.

Reconnecting with customers is one of the roughest parts of any ownership change, acknowledged a salesman at one large chemical company who has been through it. Anytime theres a new company name, theres a learning curve, said this account executive, who asked not to be named. It can take about a year really to educate the customers as to who we are with our new identity, for them to get readjusted to the new company name.

Eric Peter at Behnke said some post-merger companies may sell the same product, but without the same service as before. Driven to capture economies of scale, they hand off smaller accounts to distributors. If you get pushed off to a middleman, of course that makes the price go up, and that may make the independent blender noncompetitive on price. Thats bad for the customer, but its one less headache for the supplier whos doesnt have to handle these smaller accounts anymore.

Thats why weve moved mostly to bulk whenever possible, he continued. If youre taking a trailer load, theyre more than happy to talk. But if youre taking drums or LTL [less than truck load] amounts, youre probably going to have to deal with a middleman. In a specialty lubricant area like synthetics, Peter emphasized, you really need that close contact with the raw material supplier.

Coming Attractions?

While the pace and size of mergers seemed to ease a little in the first half of the year, some analysts see the Chemtura deal as the signal that merger fever is heating up again. If so, more turnovers may be ahead.

After a merger or spin-off, when a company reevaluates its strategy, it may decide to sell what to an outsider looks like a good business, but which it labels as non-core, Swanson of Nexant said. Non-core doesnt mean its a bad business; its just something they dont see as fitting into their plans going forward. To someone else though, a so-called non-core business can be attractive.

Where do non-core businesses go? Theyre spun off to shareholders, as BP plans for Innovene, or sold. Today, the buyers are often cash-rich private equity investors. That was the case with Oleon and Supresta, which may be flipped again in the next few years by their respective investors.

Three to five years is typically the time for turnover of these kinds of equity assets, Swanson pointed out. At that point, they have to sell or refinance the debt on more attractive terms, but meanwhile they can be expected to put in a highly focused management team, and incent them to strengthen the company. But they do expect to cash out at some point, and their exit strategy probably is already in place, though they dont usually have a specific buyer in their pocket from the start.

Blenders who want to ensure they have long-term sources of supply, Swanson said, should keep a sharp eye on these ownership changes. Also watch other markets and be aware of how else your key raw materials are being used. The alkoxylation units making your PAG may also serve the urethanes and detergent industries, for example.

Ask yourself, whats the alternative value to the manufacturer, and what do I have to pay to compete with those other uses in order to get the material I need? he advised, adding, I expect that theres a higher value paid for the PIBs that are used in lip gloss than the PIBs that go into lubricants. If a material is strategic, he warned, be prepared to pay competitive prices.

If formulators have the strength and healthy business themselves, they can purchase the raw materials they need. But thats the way business is generally. Companies will move to invest in more attractive product lines that give them the best returns. It will take a strong and healthy lubricants and greases industry to pay for raw materials to keep investments flowing.

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