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November 5, 2001
Volume 79, Number 45
CENEAR 79 45 pp. 18-19
ISSN 0009-2347
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Sunoco's Aristech buy hasn't paid off yet, but give it time, executives say


As Sunoco sees it, its 10-month-old purchase of Aristech Chemicals from Mitsubishi Corp. is an antidote to anemic growth. But the economy will need a good swift kick before Sunoco's new polypropylene, phenol, and plastics additives business--which last year had about $800 million in sales--adds to the bottom line.

TECHNOLOGY PUSH Sunoco's development center aims to create polypropylene demand.

As the economy slows, chemical demand is off, raw material costs remain high, overcapacity has led to shutdowns, and competition is fierce. This is particularly true for polypropylene, where 11 major North American companies with an annual capacity of nearly 19 billion lb continue to vie for business. Four producers--Basell, BP, ExxonMobil, and Atofina--all have a larger share of the market than Sunoco's 8%.

But Sunoco's executives see a silver lining in the dark clouds along the horizon. "In gasoline and in our other businesses, we can't create demand," Chairman and Chief Executive Officer John G. Drosdick said last month. "But in the chemical businesses we acquired, we can create demand." Gasoline sales volumes typically grow at just 1 to 2% per year, whereas polypropylene volumes have been growing at 5 to 9% annually, he said.

Drosdick talked to C&EN at the rededication of the four-year-old Pittsburgh Technology & Commercial Center that Sunoco acquired in the $695 million deal. He said the center will allow the company to "solve people's problems." Using the polypropylene film forming and molding pilot machinery, bench reactors, and analytical equipment in the 75,000-sq-ft building, Sunoco will "find ways to substitute our polypropylene for other materials so we can create demand and grow," Drosdick said.

Despite shutdowns planned at Huntsman Corp. and BP, polypropylene producers have had more than enough capacity to meet demand. Profits for the versatile plastic remain slim. "Last quarter we had good returns from refining, but we know that won't continue," Drosdick noted. "However, as chemicals recover, we hope to balance an earnings drop-off from refining operations with earnings from the chemical side. Our investment in chemicals is meant to help the company achieve sustained growth."



FOR THE THIRD QUARTER ending Sept. 30, Sunoco earned $92 million on sales of $3.5 billion. However, its chemical business had a loss of $6 million on sales of $333 million. About $1 million of the loss came from the former Aristech business; the remainder came from petrochemicals such as aromatics, propylene, and ethylene, and a polypropylene joint venture with BAR-L (Epsilon Products Co.).

For the nine months ending Sept. 30, Sunoco's chemical business lost $21 million, of which $9 million is attributable to Aristech. Chemical sales for the nine months were $1.1 billion.

When chemical profits will recover is anyone's guess. "We knew we wouldn't make money right away," Drosdick said, but he figured Sunoco made a good deal. "We bought Aristech at less than 50 cents on the dollar." And it is a deal he is proud of. "I only buy assets that make economic sense. I don't have enough time left in my career to make assets I overpaid for work," added Drosdick, who is 58.

However, Drosdick admitted that he was counting on a quicker turnaround for Aristech and the rest of the chemical business. "We were hoping that chemicals would recover by now. It may take longer because of the Sept. 11 terrorist attacks and their impact on the economy. We have no control over that." But as a sort of consolation, Sunoco will pay $21 million less for Aristech--$674 million--under the terms of the deal it negotiated a year ago with Mitsubishi, Drosdick said.

Bruce G. Fischer, vice president of chemicals, hopes a recovery for the economy and the chemical business will come soon. Federal government efforts to stimulate the economy through lower interest rates, tax rebates, and industry incentives should help people begin to feel secure again once they get over the shock of the terrorist attacks. "We may be pleasantly surprised with resumed growth next year," Fischer said.

But Sunoco is doing more than waiting for the economy to improve before it sees better results from its Aristech purchase. First, Sunoco is one of the largest U.S. producers of propylene and knows the propylene market well, both as a buyer for its polypropylene operations and as a seller to others. It is using that knowledge to get the best feedstock price for its polypropylene operations, said Bruce D. Rubin, vice president of the business.

7945bus1.Fisher 7945bus1.Rubin



Second, Sunoco has "lowered the former Aristech's cost structure by consolidating headquarters operations, stripping out some fixed costs, and making supply-chain changes," Rubin said. And polypropylene production is running strong. Over the third quarter, "We gained incremental market share," he said.

Sunoco also plans to boost its market share in other ways. One recent quick fix was its assumption of management, sales, and support at the Epsilon plant in Marcus Hook, Pa. This move gave Sunoco effective command of 12% of the polypropylene market.

Sunoco is exploring further back-integration into propylene to improve its polypropylene position. It supplies about 35% of its own propylene needs now. And for the future, Fischer suggested that Sunoco could buy other polypropylene producers that don't have the stomach to stick it out in a tough business. "We are looking for consolidation opportunities in polypropylene," he said.

"We like chemicals," Fischer said, referring to both the polypropylene and the rest of the business. And Fischer emphasized that Sunoco is in the chemical business for the long haul.

"We want to be in an industry undergoing consolidation," he said. "We like the fact that it is not as capital intensive an industry as gasoline and that its business cycle usually runs counter to gasoline." For Sunoco, at least, chemicals are medicine for a company that has relied on cyclical profits from petroleum refining and marketing for too long.

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