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Kemira sees strongest growth in APAC, niche applications for oil and gas

September 25, 2017
Energy & Chemical Value Chain

Kemira is maintaining its previously issued guidance, targeting a 14-16% EBITDA margin in the mid- to long term with market and raw material volatility accounting for the range spread, said Jari Rosendal, CEO of Kemira during the company’s capital markets day held in London on 21 September.

The company’s EBITDA margin in 2016 stood at 12.8% with EBITDA at €302.5 million ($360.3 million) and revenue at €2.4 billion.

The impacts of hurricanes Harvey and Irma on Kemira have been limited, the company says. All of the company’s staff are accounted for and safe, and Kemira sustained only a limited direct impact. The company’s assets were not damaged and customer operations were not materially affected. The indirect impact is also limited; full recovery depends on the normalization of the supply chain, because the availability of raw materials has been partially reduced, Rosendal says.

Raw materials accounted for 65% of Kemira’s variable cost split last year. Within this share, about 30% of Kemira’s raw material spend is connected to volatile items in the vertically integrated petrochemical value chain. But the company has continued to reduce its single-source raw material dependency and is targeting single-source exposure below 5% of total raw material spend, says Thierry Blomet, senior vice president/sourcing.

The company is introducing digitalized and automated solutions at the sourcing level to improve risk mitigation. As part of this digital strategy, Kemira has outsourced its logistics in North America to Odyssey (Danbury, Connecticut), which early this year began operating all of the North American external road transportation activities integrating its logistics platform to Kemira’s SAP enterprise resource planning system. The program will also be rolled out in Europe. Kemira spends €170 million/year on road transportation and this program is targeting €20-30 million in annualized savings and €50 million in inventory reductions.

The company will continue to focus on organic growth, seeking a more balanced cash flow going forward. The company’s capital expenditure (capex) strategy will reflect this move away from the company’s high capex period during the last few years, Rosendal says.

Kemira’s capex guidance for next year is €160-200 million depending on the timing of opportunities. This figure includes capacity expansions for the company’s oil and gas business but excludes M&A. The company expects that from then on its capex will be 5-6% of revenue, in line with industry norms.

“While the company continues to monitor the space for potential acquisitions these will need to have reasonable valuations in addition to being accretive to profitability and provide a synergistic fit,” Rosendal adds. “[We] are keeping an eye on opportunities to add technology/innovations or geographies but carefully understanding the limits of our balance sheet.”

The company’s new sodium chlorate capacity at Joutseno, Finland, started up earlier this month and is ramping up. The company has already committed all of the additional production from the €50-million investment, which doubled sodium chlorate capacity at the site, says Kim Poulsen, president/pulp and paper. The project was delivered under budget and ahead of schedule, and the company anticipates it will reach maximum capacity utilization in the second half of next year.

Growth drivers

APAC is the region with the strongest growth and represents further opportunities across Kemira’s two business segments, in particular water treatment, and pulp and paper applications, Rosendal says. APAC currently represents 10% of Kermira’s total revenue, and the company estimates 3-4% compound annual growth in APAC between 2017 and 2022.

Kemira’s pulp and paper business represents 62% of total revenue and last year contributed about €1.46 billion, up 2.8% year-over-year (YOY) and EBITDA grew 14%, YOY to €195 million. The company expects the pulp and paper market to grow 1%/year overall, although in APAC this will likely be closer to 2-3%/year.

The company also has approximately a 10% share of the APAC pulp and paper market. The acquisition in May 2015 of AkzoNobel’s paper chemical assets has strengthened Kermira’s position in APAC; four out of the six sites acquired are located in the region. A capacity expansion at the Nanjing, China, site—currently ramping up—will further strengthen Kemira’s position, Poulsen says. Kemira also plans to ship part of the newly added sodium chlorate production capacity at Joutseno to APAC, to support the growth in demand from the region’s pulp and paper industry.

Kemira’s position in the industry and water market in APAC is also growing albeit from a smaller base, Rosendal adds. The recent focus of the Chinese authorities on improving water quality notably offers growth opportunities for municipal and industrial water treatment, Antti Salmine, president/industry and water says.

Water and industry growth driven by innovation in oil and gas applications

The merging of Kemira’s municipal and industry, and oil and mining businesses to create the water and industry segment has generated €15-20 million in group-level cost savings. The segment represents 38% of Kemira’s annual revenue. Water treatment applications generate 70% of the revenue and the segment has 2-3%/year growth potential, the company says. The company has a 30% market share in water treatment in Europe and North America.

Other applications are forecast to grow at a similar rate but are too diverse to be singled out, Kemira says. Oil and gas applications represent the strongest growth segment at 5-6%/year, and Kemira’s market share in polymers used for friction reduction in shale fracking is more than 30%. Oil and gas applications account for 7% of the company’s total revenue but have significant revenue-generation potential, says Pedro Materan, senior vice president/oil and gas.

Oil and gas applications drove growth in excess of 9% for Kemira’s industry and water segment in the first half of this year. Oil and gas revenue increased 47% in the first six months of the year. Fracking is a water-intensive activity and polymers for this application alone have a market potential of €200 million/year, Materan says. The chemical-enhanced oil recovery market, meanwhile, is worth €1 billion/year and accessible to Kemira, Materan adds.

By Francinia Protti-Alvarez

Source: Chemical Week

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