Financial Times: Plastics: “Take the case of Basell, the BASF and Shell joint venture now on the auction block” (ShellNews.net)

23 August 04

“I want to say one word to you just one word,” Mr McGuire told young Benjamin Braddock in the 1960s film, The Graduate. The word, of course, was plastics. But although plastics have clearly revolutionised our lives, making money out of them has not been as easy as Mr McGuire thought.

Plastics are made from the gasses derived from petroleum. Many are produced by the chemical divisions of oil giants. But poor investment timing, resulting in overcapacity, has meant poor margins. Now, oil companies are taking advantage of a cyclical upswing to rid themselves of these divisions.

There are reasons to believe that, in the hands of other owners, the petrochemical plants could be run more efficiently. Take the case of Basell, the BASF and Shell joint venture now on the auction block. It had turnover of €5.7bn last year and operating margins just above 5 per cent. Margins are estimated to have reached almost 10 per cent in the first half of this year, thanks to the cyclical upturn.

Trade and financial buyers have signalled interest in Bassell; the latter are also eyeing the petrochemical plants that BP and Total want to sell. Financial buyers are attracted by the chance to play a part in Europe's petrochemical restructuring. A carrot is the prospect of superior margins in the next three years, as the cycle reaches its peak. This would build up cash for the leaner times. If costs can be cut and investment in new plants curtailed, these plants may yet prove profitable.

The stick lies beyond 2007-08. Then, new capacity is expected to be operating throughout the Middle East. By 2009 chemical consultancy CMAI estimates that the operating capacity rate for linear low-density polyetheline,a major plastics compound, will fall to close to 85 per cent. Below this, profitability is tricky. But it may be worse. More plants could be built in the Middle East and no one knows what China is planning. If the 2006-2011 five-year plan includes chemical capacity, profitability for European petrochemicals companies may prove elusive once again.