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September 09, 2002 02:00 AM

'Competitive' may mean 'cooperative' in PET

Frank Esposito
Senior Staff Reporter
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    The recently announced resin-production deal between PET rivals Voridian Co. and Wellman Inc. might seem strange at first, but it could be the shape of things to come for PET makers looking to stay competitive without breaking the bank.

    The deal calls for Shrewsbury, N.J.-based Wellman to supply Voridian with amorphous PET, which Voridian then will convert into bottle-grade material. Voridian will use excess capacity in Columbia, S.C., or at a shuttered plant in Toronto, for the project, which is expected to produce as much as 260 million pounds of PET each year.

    ``Why should we build new assets when we can use existing assets in a creative way?'' T.J. Stevens, Voridian North American PET business director, asked in a recent telephone interview. ``I don't know if this type of arrangement is going to become typical, but I do see the survivors in the PET market finding smart ways to satisfy global demand growth of 8-10 percent.

    ``There are better ways to do that than by building a whole new plant,'' Stevens added.

    Wellman investor relations officer Dennis Sabourin agreed, calling the deal ``a win-win situation.''

    ``We see the packaging industry growing significantly over the next several years,'' said Sabourin, whose firm ranks fourth in the North American PET market, with about 15 percent of total capacity.

    ``With capacity utililization currently in the 90s [in percentage], there's going to be a need for new material.''

    Material produced via the partnership will be split beween the two firms and will be marketed separately. The two sides are working out details as to what combination of Voridian and Wellman formulations will be used to make the resin.

    Voridian also has not determined if it will supply the Wellman deal with capacity in Columbia or Toronto, or a combination of the two. The Toronto site closed earlier this year when Voridian lost a major customer in the area. The plant had been operated for Voridian by Eastman Kodak Co., the former parent firm of Eastman Chemical.

    The deal could be looked at as adapting in order to survive. Kingsport, Tenn.-based Voridian, a unit of Eastman Chemical Co., is the world's largest PET maker, but has faced widespread speculation in recent years that it would exit the market. Half of North America's six major PET makers have changed hands in the past five years alone, with businesses owned or operated by Trevira, Shell Chemical and DuPont Co. morphing into KoSa, M&G Group and DAK Americas.

    Thin profit margins and increasing commoditylike performance have made the going tough. Wellman's ongoing operations - including PET, fibers and recycling - posted a profit of more than $18 million in the first half of 2002, but an accounting change resulted in the firm reporting a loss of more than $200 million. Almost $24 million of that amount was pinned on the recent sale of a yarn business and closing of a PET staple fiber unit.

    In Wellman's packaging products unit - which includes PET - first-half sales were down 6 percent to $260 million, while first-half profit dipped 19 percent to $29 million.

    Voridian's polymers business - including PET and polyethylene - saw its first-half sales drop 9 percent to $764 million, although the business turned a profit of $52 million after losing $163 million in the first half of 2001.

    The deal shows that both Voridian and Wellman ``are thinking about lowering capital spending and are willing to look at cooperative options,'' according to Chase Willett, an industry analyst with Chemical Market Associates Inc. in Houston.

    ``When a business becomes a commodity, strategy and tactics start to change,'' Willett said. ``And the timing of this move is good, since demand looks to be strong again in the first half of next year.''

    In addition to its deal with Voridian, Wellman plans to add 285 million pounds of new capacity in Bay St. Louis, Miss., by 2004 by converting a fiber line. The move is less expensive than a major capital investment and will create a dozen new jobs, Wellman's Sabourin said. The line also can be returned to fiber operation if needed.

    Other capacity additions by DAK Americas in Charleston, S.C., and by M&G Group in Altam¡ra, Mexico, will add a total of more than 900 million pounds of capacity to the North American PET market by the end of 2003.

    U.S. PET consumption is on pace to finish 2002 at 4.8 billion pounds, according to Stevens, with 40 percent of that coming from carbonated soft drinks and at least 12 percent from bottled water. The water market has gushed forward with growth of more than 20 percent this year, compared with carbonated soft drink growth of 2-3 percent.

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