Indorama Ventures Plc (IVL), the world's leading producer of intermediate petrochemical products, is preparing to make a foray into India and strengthen its position in North America as it pursues new mergers and acquisitions (M&A) worth about US$1 billion.
The SET-listed company has announced five deals so far this year as part of its three-year capital expenditure plan worth $3.5 billion through 2018. The latest transaction, announced last Thursday, involved the acquisition of an integrated plant of Compañía Española de Petróleos SAU (Cepsa) in San Roque, Spain. The plant produces 720,000 tonnes of polyethylene terephthalate (PET), purified terephthalic acid (PTA) and purified isophthalic acid (PIA) per year. It is located adjacent to Cepsa's refinery which supplies paraxylene and metaxylene via a pipeline.
The acquisition propels IVL into second place among global PIA producers with a 21% market share. The company also will benefit from integration and an increase in high value-added petrochemical (HVA) exposure, said IVL chief executive Aloke Lohia.
The transaction value was not disclosed but Mr Lohia said that normally the company paid the equivalent of $500 per tonne for HVA petrochemical operations and less than $500 for commodity petrochemicals including PTA and PET.
"We have a growth plan that includes attractive acquisition targets," he told Asia Focus. "Potentially, more acquisitions will be announced during the course of this year appropriate to our long-held strategy of expanding geographically to meet the needs of the global brands on a local basis and expanding our scale for commodity products while investing in high value-added products that will strengthen our bottom line."
A source close to the company told Asia Focus that IVL was about to seal a deal to acquire a polyethylene PET asset in India with annual capacity of 220,000 tonnes, making its first entry to the vast market there.
The company is also close to completing negotiations for a PTA business in the United States with a capacity of 1.7 million tonnes a year, following IVL's acquisition of a PTA company in Montreal, Canada in March this year. PTA is used to produce PET, which is made into plastic containers.
There are four PTA producers in North America: British Petroleum's BP Chemical with a combined capacity of 5.2 million tonnes, Eastman Chemical (1.9 million), Invista (1.55 million) and DAK America (1.3 million tonnes). The source said the most likely acquisition target for IVL would be a BP plant. It is located next to a refinery and the acquisition would further enhance the Thai company's dominance of more than half of the PTA market in North America.
Mr Lohia declined to comment on potential new acquisitions but said that given the company's strong cash flow and operating results, IVL would therefore "continue to look at the deals in the pipeline".
"Still, we have something under negotiation in North America but we cannot name projects that have not been announced to the [stock] exchange. We are always pursuing some valuable opportunities in markets where we expect to grow," he said.
IVL already has an extensive footprint in many North American and European markets and will continue to seek "unique opportunities which have a good fit", especially if they have a strong HVA component. Expanding HVA offerings in the Western market will help the company to reduce its reliance on Asian commodity petrochemicals which are a cyclical business.
"Meanwhile, India is a growing and vast market with much potential so we naturally are looking at opportunities there," added Mr Lohia. "At present, we have not made any conclusions there but will keep the market informed if we do.
"After China, where we have an adequate presence, India is a rapidly growing market where we have kept a constant watch and we will invest there when we have the right opportunity in which IVL can add value."
The company also completed the acquisition of a 400,000-tonne gas cracker in the US state of Louisiana in the third quarter. The project is expected to start commercial operations at the end of 2017. The new acquisition in Spain followed IVL's buying of Cepsa's 600,000-tonne Canadian PTA asset in June, marking as its first investment in PIA which offers high value-added.
"In the HVA businesses, we will grow our profit and increase our overall margins as these businesses have a high barrier to entry and are protected by technology," Mr Lohia said.
Globally, there are only four major producers of PIA and half of the total output is consumed by the PET business, in which IVL is the world's largest producer, he added.
"Demand for commodity petrochemicals, meanwhile, is growing at a steady rate and even advantaged due to the absolute drop in prices due to crude oil. We therefore need to continually expand our scale to accommodate that and maintain our leadership," he said.
Thanks to its continual expansion, IVL has some of the lowest costs in the industry worldwide.
"The major benefits we will accrue from acquiring selective assets is consolidation of the industry and improving our supply chain costs and an improved relationship with key brands, who require short lead times and low inventories," Mr Lohia said.
With a 24% decline in prices of Brent crude in September, as compared to June, product prices saw a declining trend during the third quarter. This resulted in non-cash inventory devaluation during the quarter across the value chain.
However, the absolute prices of IVL products are normally adjusted in line with raw material prices, with some lag effect whereby core profitability is not affected.
IVL in the first nine months of this year earned a net profit of 2.9 billion baht (0.47 baht per share) compared with 2.16 billion (0.45 baht per share) a year earlier.
The US PET industry was buoyed during the quarter by preliminary findings by the Department of Commerce in its anti-dumping investigation into PET resin imports from India, China, Oman and Canada.
PTA industry margins in Asia, meanwhile, remain under pressure. The startup of a new PTA plant in the third quarter added to the imbalance in the short term, but some bankruptcies and closure announcements are expected to ease the pressure. IVL expects even more small-scale and non-integrated operators to exit, mainly in China, Taiwan, South Korea, Japan and Southeast Asia.
"The consolidation of the industry and improved supply chain costs, caused by lower oil prices and a strong dollar have helped us to grow our profit," said Mr Lohia. "We will continue to increase our global footprint and scale of production to meet the needs of the major global brands that are not seeing a lowering of demand."
As far as petrochemical prices and spreads are concerned, IVL foresees a stable outlook toward 2016.
"We believe that most of our spreads in the West and for HVA are expected to remain stable toward the end of 2015," he said. "We have improved our cost over the course of this year and will continue to further improve in 2016 with certain debottlenecking projects and energy efficiency projects in the pipeline."