Taking to the podium with his bankrupt company vanishing around him, Borden Chemicals and Plastics LP Chief Executive Officer Mark Schneider offered a realistic and straightforward look at the North American PVC market at the CMAI World Petrochemical Conference in Houston.
``The industry has just gone through two consecutive years of North American demand drop for the first time since 1980,'' said Schneider, a longtime industry vet who took the reins at Borden in 2000. ``This led to abysmal operating rates, and profit vanished as prices dropped.
``These conditions were absolutely not sustainable and Borden was a casualty of this decline.''
Geismar, La.-based Borden, with a 5 percent share of the North American PVC market, filed for bankruptcy in April 2001. The firm recently sold its Addis, La., site to rival Shintech Inc. and is in the process of selling its Illiopolis, Ill., plant to Formosa Plastics Corp. USA. It stopped PVC production at Geismar, the last of its three plants, in mid-March.
Most of Borden's woes could be traced to its lack of upstream integration into raw materials like vinyl chloride monomer or chlorine, and its lack of downstream integration into end markets like compounding or pipe making.
``Integration doesn't eliminate volatility, but it allows producers to capture profitability throughout the chain,'' Schneider said. ``High integration is the model that will succeed in the future.''
Schneider cited examples of successful integration, such as pipe subsidiaries owned by competitors Formosa and Westlake PVC Corp. He added that capacity leader Shintech is ``virtually integrated'' upstream through its chlorine supply arrangement with Dow Chemical Co. and downstream via its dealings with pipe maker Diamond Plastics Corp.
Oxy Vinyls LP may be able to claim a similar advantage by supplying PolyOne Corp., the giant PVC compounder that owns 24 percent of that PVC maker, Schneider said.
Counting those examples - and internal PVC supplies for processors Royal Group Ltd. and CertainTeed Corp. - brings the industry's captive resin requirement to about 44 percent. Schneider added that he would not be surprised if the number hits 50 percent in the near future.
That trend and other challenges facing the industry lead Schneider to predict that North America will be served by only three PVC makers by 2006. Shintech and Formosa are two, while a third player will be created through further industry consolidation, he said. Those remaining three will hold about 90 percent of North American capacity.
Schneider concluded by offering three pieces of advice for success in the PVC market.
``First, keep debt off your books, because too much debt will severely limit your options,'' he said. ``Then avoid following the herd on capital investments. Be willing to invest and expand during a cycle trough.
``Finally, be paranoid of your competition,'' Schneider added. ``The best businesses have a fear and respect of their opponents. Underestimating the competition is a fatal error in judgment.''
Looking back at his time at Borden, Schneider said a more robust economy ``would have covered up some sins,'' but the firm's long-term integration problems would have remained.
``We could have continued longer [in a stronger economy], but our overall strategy was to combine with a larger entity,'' he said.
