Lyondell Petrochemical Co. of Houston announced April 17 that it intends to spend $400 million to acquire the high density polyethylene business of Occidental Chemical Co. OxyChem of Dallas has 1.5 billion pounds of HDPE production capacity at Victoria and Matagorda, Texas. OxyChem acquired the business in 1988 as part of its purchase of the former Cain Chemical Co.
The Lyondell transaction includes 350 employees and rights to Occidental Chemical's Alathon trademark for its HDPE resins.
Coupled with Lyondell's 15 million pounds of production capacity for PE, the acquisition makes Lyondell the eighth-largest producer of PE in North America.
The announcement was rumored and expected for several weeks and drew a resounding ``ho-hum'' from executives in the industry. Paul Raman, vice president for research for S.G. Warburg & Co. Inc., said the value of the transaction indicates a telling aspect of the industry.
``This illustrates that it is cheaper to acquire resin production capacity than it is to build new capacity,'' Raman said, estimating that it would cost $600 million to build 1.5 billion pounds of HDPE capacity.
``Lyondell acquired this capacity at 40 percent of the replacement cost. That is why the industry is seeing 11/2 percent growth in production capacity each year,'' Raman said.
Lyondell paid $350 million for the production facilities and the rest for inventories.
Jackie Wilson, a Lyondellspokeswoman, said her company hopes to close the transaction by May 15.
In its announcement, Lyondell said Occidental Chemical has agreed to supply ethylene to the HDPE business for a limited time, but later Lyondell will supply its own needs.
Ron Gist, an industry analyst with Pace Consultants of Houston, said the transaction may help stabilize the merchant market for ethylene. Until the acquisition, Lyondell is the largest merchant seller of ethylene.
The company will slip to fifth after it begins to supply ethylene to its HDPE business, Gist said.
Separately, Lyondell produces 300 million pounds of polypropylene at its Pasadena, Texas, facility, where a debottlenecking project is under way. That project will give Lyondell capacity to produce 400 million pounds of PP.