Arkema: Transformation of a specialty chemicals player

19:03 PM | June 1, 2015 | Natasha Alperowicz in Paris

Arkema (Paris), France’s largest chemicals company by sales, is significantly reshaping its portfolio to focus on more profitable businesses. The recent acquisition of Bostik, the world’s third-largest adhesives company; major investments to expand operations in Asia; and restructuring in the mature markets of Europe are the key points in the company’s transformation.

Next year will mark the 10th anniversary of Arkema’s listing on the Paris stock exchange following the company’s spin-off from energy group Total in 2004. Arkema, France’s biggest chemicals group by revenue and one of the leading specialty chemical players worldwide, originally comprised most of the specialty chemicals businesses and the polyvinyl chloride (PVC) operations of Total. Its creation followed several decades of restructuring of the French chemical industry. Arkema separated from Total in May 2006 via a stock-exchange listing. The company has a very different portfolio today, and, under Thierry Le Hénaff, CEO since the company’s inception, Arkema’s target to move further up the profitability ladder is well defined. The two most significant moves in this transformation have been the 2012 divestment of the PVC business, which had weighed on the company’s performance for most of its existence, and the acquisition earlier this year of Bostik. Arkema has, since 2006, acquired businesses with combined sales of €3 billion ($3.27 billion) and disposed of businesses with total sales of €1.5 billion. New activities now account for 40% of the portfolio, which continues to be fine-tuned, with Arkema planning to divest assets with combined sales of €700 million/year within the next three years, Le Hénaff says.

He liked the products so much he bought the company

Le Hénaff, a former CEO of Bostik, had his eyes on that company for several years and was quick to act when Total decided to sell. “Bostik is very complementary to everything we do, from innovation and applications to end customers, where technology and branding are important. It is the most downstream business for Arkema and a very good step forward because our strategy from the beginning was to develop Arkema downstream,” Le Hénaff says. The €1.74-billion deal is by far Arkema’s largest acquisition. Bostik brings Arkema into competition with the other leading adhesives producers: Henkel, by far the largest; Sika; and HB Fuller. The top four players together control an estimated one third of the world market.

Bostik had sales of €1.53 billion in 2014, with 45% going to construction and consumer markets and 55% to industry and nonwovens. About 15% of Bostik’s sales last year were from products less than three years old, up significantly from 8% in 2010. The business’s Ebitda was €158 million, and the Ebitda margin was a below-average 10% in 2014. Bostik plans to increase Ebitda by 30% by 2017 and raise the Ebitda margin to 14–15% by 2020. The company now forms the specialty adhesives unit within Arkema’s high-performance materials (HPMs) business.

Le Hénaff is enthusiastic about moving closer to the consumer thanks to the Bostik acquisition. “This is the beauty of the acquisition because we believe that the exposure to the consumer is a good thing. Bostik has strong brands, such as Bostik, Evostik, and Blu Tack.” The company is also a more natural fit with Arkema than with Total, he says. “It is good for Bostik to be a part of a real chemical group, smaller in size, more decentralized, truly entrepreneurial. As with Cray Valley and Sartomer—businesses that Arkema acquired from Total earlier—Bostik will do more within Arkema because we are closer in terms of culture than they were with Total, which is an oil company,” Le Hénaff says.

The integration is well under way, and it does not involve job cuts. “Bostik has 48 sites, and the business needs to be close to customers, so it is not a cost-cutting or head-count-reduction project,” he says. Some cost reductions will be achieved through leveraging supplies of raw materials, freight, and other services, as well as equipment purchases. “Arkema will supply Bostik with raw materials that, for the time being, Bostik is buying from outside, such as acrylic resins and some polyolefins, which we have in the group,” he adds.

Three years down the line, Arkema will implement commercial synergies. These will include common customers and technology, including leveraging the value chain from acrylics down to adhesives. “In terms of technology, we will look at how we can expand their adhesives range of polymers, for example structural polymers. Arkema has a lot of technology that could help Bostik develop the high-end of the adhesives range,” Le Hénaff says.

Arkema will be a consolidator in the adhesives market, which remains fragmented. Bostik, although a leading player, has a worldwide market share of only 4–5%. “Half of the growth of the segment will be organic and half by bolt-on acquisitions,” Le Hénaff says.

Bostik joins the technical polymers, filtration and adsorption, and organic peroxides businesses in Arkema’s HPMs business unit. Bernard Pinatel, CEO of Bostik, has been appointed to Arkema’s executive board and head of HPMs. The segment’s share of Arkema’s group sales is expected to rise to about 50% as a result of bolt-on acquisitions and the divestment of businesses in the other segments—industrial specialties and coating solutions. Marc Schuller is the v.p. responsible for these other two business segments.

HPMs, including Bostik, accounted for 45% of pro forma sales in 2014, compared with 26% for industrial specialties—thiochemicals, fluorinated gases, polymethyl methacrylate (PMMA), and hydrogen peroxide (H2O2)—and 29% for coating solutions—acrylic acid and esters, coating resins, Coatex, and Sartomer.

Arkema reports sales down 1.4%, to €5.95 billion, in 2014, with Ebitda 13% lower, at €784 million. The Ebitda margin was 13%, compared with 15% in 2013. The downturn reflected challenging market conditions in some of its businesses, notably fluorinated gases and acrylics. Pro forma sales of the enlarged Arkema, including Bostik, were approximately €7.5 billion in 2014. The expanded company has 19,000 employees; 137 production sites; 13 R&D centers; and 1,700 researchers worldwide.

Arkema holds top-three market positions in 90% of its portfolio. It is the leading producer of specialty nylons, polyvinylidene fluoride (PVDF), and thiochemicals; the second-largest maker of organic peroxides, fluorinated gases, and PMMA; and the third-largest player in adhesives, H2O2, acrylics, and coatings. It expects to become, via selected investments and acquisitions, a world leader in specialty chemicals and advanced materials by 2020, with €10 billion in annual sales and a 17% Ebitda margin. The Ebitda target for 2017 is €1.31 billion.

Arkema’s bolt-on acquisitions include the recent purchase of Oxido (Anagni, Italy), a €20-million/year company specialized in the formulation of organic peroxides used to cross-link rubber and plastics and as initiators and hardeners for polyester resins. More bolt-on acquisitions are on the horizon, Le Hénaff says, notably in adhesives, specialty polymers, and organic peroxides.

Organic peroxides are a particular focus. An expansion project at Changshu, China, slated to be onstream in January 2016, will double capacity there. However, construction has not started on an organic peroxides project announced for Saudi Arabia. “With Bostik’s acquisition, we had to manage our cash, so the Saudi project is a little delayed,” Le Hénaff says.

Asia and North America feature strongly in Arkema’s growth plans. The company aims to split sales equally in each of the main regions. “The latest this target applies to is 2020, but it should be achieved between 2017 and 2020,” Le Hénaff says. Last year, the split, excluding Bostik, was Europe 41%, North America 35%, and Asia and the rest of the world 24%. Bostik’s sales were divided between Europe (50%), North America (21%), and Asia and the rest of the world (29%).

Geographically, Asia has been Arkema’s major focus since the company’s creation. Two significant projects—a recently completed thiochemicals platform in Malaysia and an acrylics acquisition in China—will add to the company’s operations in the region, which include the well-established Changshu complex, Arkema’s largest manufacturing site.

Arkema started up earlier this year a €200-million thiochemicals complex at Kerteh, Malaysia, in a two-part joint venture with CJ CheilJedang (Seoul). The first jv, owned 86% by Arkema and 14% by CJ CheilJedang, produces methyl mercaptan, dimethyl disulfide, and heavy mercaptans, primarily for the animal feed, refining, petrochemicals, soil-fumigation, and polymers markets. The second jv, owned 86% by CJ CheilJedang and 14% by Arkema, produces biomethionine for animal feed based on on-site methyl mercaptan. CJ CheilJedang has contributed its biofermentation technology to produce L-methionine, and Arkema has provided its methyl mercaptan process. The project is expected to contribute $120 million to Arkema’s sales in 2016.

Separately, in January 2014, Arkema signed a $240-million agreement with Jurong Chemical, the largest producer of acrylic acid in China, to form a majority-owned jv to access Jurong Chemical’s acrylic acid and butyl acrylate production at Taixing, China. The new jv, Taixing Sunke Chemicals, operates a three-line complex with an installed capacity for 480,000 m.t./year of acrylic acid. The complex, which opened in 2012, was expanded at the end of last year with the final 160,000-m.t./year line, making the manufacturing site one of the largest for acrylic acid. The deal gives Arkema access to 160,000 m.t./year of acrylic acid; 80,000 m.t./year of glacial acrylic acid; and 90,000 m.t./year of butyl acrylate. Arkema will have, for an additional $235 million, access to a second tranche of the Taixing assets, which are designed to produce 160,000 m.t./year of acrylic acid; 180,000 m.t./year of butyl acrylate; and 160,000 m.t./year of glacial acrylic acid. The closing of the second leg of the deal, however, has been postponed from the first quarter of 2015 to January 2016. Arkema has an additional option until early 2020 to acquire the third and final line at the site for $165 million.

Arkema has also strengthened its acrylics operations in the United States. It brought onstream in July 2014 a 45,000-m.t./year methyl acrylate production plant at Clear Lake, TX—the last phase of a $110-million project.

Including the first Sunke line, Arkema has 770,000 m.t./year of capacity for acrylic acid: 270,000 m.t./year at Carling, France; 270,000 m.t./year at Clear Lake; and 65,000 m.t./year as part of a 50-50 jv with Nippon Shokubai at Bayport, TX. The acquisition of the second line at Taixing will raise the company’s total acrylic acid capacity to 930,000 m.t./year.

Acrylics has been a success story for Arkema, Le Hénaff says. “It is a cyclical business, and sometimes we are very happy and sometimes less happy. Today, we are less happy, but we are very well positioned,” he says. “It will be progressively better in 2016 and 2017.”

Arkema, taking advantage of the shale gas revolution in North America, has signed a deal with Enterprise Products Partners (Houston) to secure a competitive supply of propylene for Arkema’s acrylics operations in the United States. The deal will provide Arkema with a significant part of its propylene needs in the country for more than 10 years. Enterprise will supply product from its propane dehydrogenation plant at Mont Belvieu, TX, that is slated to be completed in 2016. In France, Arkema sources propylene for its acrylics operations at Carling and for the Lavéra oxo alcohols plants under long-term contracts from Total’s steam crackers at Carling and Lavéra. Arkema is in discussions with Total on future propylene supplies following Total’s announcement that it will close the Carling cracker.

Fluorinated gases are another major business for Arkema, but the unit has faced challenging market conditions of late. Competitiveness gaps with China and the United States have severely weakened Europe’s fluorinated gas industry for several years, and EU regulations requiring investment for additional compliance standards have increased the cost burden. As a result, Arkema has announced the closure of its fluorinated gas facilities at Zaramillo, Spain, ending the site’s production of hydrofluorocarbon-32 and hydrofluorocarbon-143a gases and blends. But, market conditions in the fluorinated gases business have stabilized since mid-2014, Le Hénaff says.

Arkema continues to develop the new-generation hydrofluoro-olefin gases with low global warming potential (GWP), including the new 1234yf refrigerant for automotive air conditioning. This will meet the demands of the European Union’s mobile air conditioning directive, which has banned the use of refrigerants with a GWP higher than 150 for new vehicle platforms manufactured since 1 January 2013 and in all new vehicles sold in Europe from 1 January 2017.

Legal case pending

The European Commission opened a formal investigation in 2011 into alleged anticompetitive practices by DuPont and Honeywell International in the marketing of 1234yf refrigerant for automotive air conditioning. The commission issued a statement of objections on 21 October 2014 against the two companies’ cooperation agreements, which it says limit the market availability of 1234yf and the technical development of the product. Arkema says it is confident that the outcome of the proceedings will open up of the market. In 2013, Arkema announced plans to begin producing 1234yf. The first step consists of a manufacturing plant at Changshu, scheduled to be onstream in 2016. A second unit is expected to follow in Europe to meet growing demand.

Arkema is also back-integrating into the production of fluorspar, the main raw material for fluorochemicals. It signed an agreement in 2011 with Canada Fluorspar Inc. (Markham, ON) to develop a jointly owned, 50-50 mine at St. Lawrence, NF, to provide Arkema with long-term competitive access to fluorspar. Arkema has another fluorspar project that “could be very, very good,” Le Hénaff says. He declines to disclose details but says that the Chinese autonomous region of Inner Mongolia is a major source of the mineral.

Renewable technologies feature strongly in Arkema’s portfolio. Almost 13% of the group’s sales are generated in full or in part from renewable raw materials, up from 11% in 2011. “We will reach 15% between 2017 and 2020,” Le Hénaff says. Examples include Arkema’s Rilsan nylon-11 production from castor oil at Marseille, France; and two subsidiaries in China that were acquired in 2012: Casda Biomaterials (Hengshui), which makes sebacic acid from castor oil, and Hipro Polymers (Zhangjiagang), which makes nylon-10,10 and nylon-10,12, from sebacic acid supplied by Casda. Arkema said recently that it is expanding its product offering with a biosourced nylon-6,10 range, partially produced from castor oil. The product, which is being produced at Zhangjiagang, closes the gap between long-chain nylons and nylon-6 and nylon-6,6.

Arkema acquired in 2013 a 25% stake in Ihsedu Agrochem (Mumbai), a subsidiary of castor oil producer Jayant Agro (Mumbai). The deal will cover a significant part of Arkema’s castor oil needs, but the company will remain a very important buyer on the open market.

Bird’s-eye view: Changshu, China, has become Arkema’s largest manufacturing location.

Arkema is also working on several development projects using renewable raw materials. It formed a partnership in 2012 with Elevance Renewable Sciences (Woodridge, IL) to develop specialty biosourced polymers using metathesis technology, but results are not expected soon. “It is a long-term project, targeting 2020 or beyond,” Le Hénaff says.

On average, Arkema spends 2.5% of sales on R&D and is working on many innovation projects. These include the low-GWP refrigerant, extending the company’s nylons portfolio, the recently commercialized, ultrahigh performance polymer polyetherketoneketone (PEKK), and Arkema’s Elium methacrylate resins.

Arkema plans to expand its Kepstan PEKK business significantly by doubling capacity in France by 2016 and building a world-scale manufacturing facility at Mobile, AL, by the second half of 2018. PEKK is used in carbon fiber composites and 3-D printing. Arkema makes the product in Europe in partnership with the specialty and fine chemicals firm PCAS (Longjumeau, France), which has a plant at Couterne, France, that uses a process developed by Arkema’s Cerdato, France, research center. PEKK complements Arkema’s range of thermoplastic resins and broadens their range of applications in the aerospace, energy, and electronics sectors. Arkema is present in these markets with its nylon-11 and Kynar PVDF specialty polymers and its Elium methacrylate resins. Elium is a range of liquid thermoplastic resins that combine the resistance of a composite with the recycling properties of a thermoplastic to make thermoformable and recyclable thermoplastic composite parts. Arkema makes Elium resins at Mollet del Vallès, Spain.

“With biosourced resins and liquid resins for thermoplastic composites; the latest generation of structural adhesives and specialty additives; and brands such as Elium, Polystrand, Kepstan, and Kynar, we have a diverse range of innovative solutions for high-performance composite materials,” the company says.

North America remains important to Arkema. The company increased its share of overall sales there from 18% in 2005 to 35% last year, and Bostik will make a major contribution in the region. Arkema boosted its presence in North America by acquiring Dow Chemical’s acrylic acid and acrylic latex assets in 2009, as well as Sartomer, a producer of coating and photocure resins, from Total in 2011. Investments at the Clear Lake acrylics plants and the Beaumont thiochemicals operations have also strengthened Arkema’s North American footprint. With Bostik, the company now has 34 production sites; three R&D centers; and 3,400 employees across the region. “With world-scale assets like Calvert City for fluorinated gases, fluoropolymers, and acrylics and Beaumont for thiochemicals, we are cementing our place as a major operator in the United States,” the company says.

Europe is a different story, however, and the company continues to restructure in this mature region. It closed the Stallingborough, UK, coating resins plant last year, cutting 58 jobs, and has continued deliveries to customers from other European sites. In acrylics, Arkema closed at the beginning of last year the Chauny, France, plant, which manufactured chemical intermediates for PVC plasticizers and alkyd resins for paints. The company also announced in March that it will shut down a coating resins facility at Villers-Saint-Paul, France, losing 26 jobs. It is also closing the Zaramillo, Spain, fluorinated gases facility.

Analysts applaud the company’s transformation but say that its targets may be too ambitious. “Le Hénaff has done a good job in not only shifting the portfolio but also the market’s perception from a group heavily influenced by the PVC cycle to a much more diverse, downstream specialty chemical company. But a diverse downstream business brings its own challenges. They are often unpredictable, with unforeseen market changes having potentially significant effects on profitability, as the past 18 months have demonstrated,” says Peter Mackey, chemicals research analyst at Exane BNP Paribas (London).

Mackey sees Arkema’s transformational acquisition of Bostik as a positive move, but he is less enthusiastic about the acrylics assets purchase in China. “Bostik could play a significant role in raising the perceived quality of Arkema’s portfolio and enhancing returns. But, equally, Arkema’s other significant recent acquisition of acrylic acid capacity in China is seen as shifting the portfolio in the opposite direction,” he says. Mackey also sees challenges in other areas. “Arkema has a strong position in fluorochemicals, for instance, but external factors led to a collapse in profitability in 2013–14, which Arkema is acting to recover. However, the main cyclical challenge is acrylic acid, where having access to the most competitive technology is key, and there is little Arkema can do proactively to resolve the cyclical weakness in that market,” he says.

Le Hénaff is well aware of the challenges that Arkema faces, but he says that the company’s recent achievements have paved the way for increasingly profitable growth. “When we started, we had a market capitalization of €1.7 billion. We are now at €5 billion. Certainly, not everything is perfect today, and we have a lot of things to do, but when I look at the market cap today and I look at the quality of the portfolio, the geographical balance, the arrival of Bostik, I think we have a really very good platform for the coming years.” Arkema, as a result, is on the right track, Le Hénaff says. “Yes, we have challenges and things to fix, but the trend and momentum are good. We know what challenges we have to address. We know where the potential for growth is the strongest, and our strategies are clearly defined,” he says.