HOUSTON (Oct. 16, 1:15 p.m. ET) — Kraton Performance Polymers Inc. of Houston has exited its joint venture deal with Taipei, Taiwan-based Formosa Petrochemical Corp. (FPCC), seeking instead to expand hydrogenated styrenic block copolymer (HSBC) manufacturing capability in Asia on a stand-alone basis.
The company is focusing on locations in the region that were identified during the site-selection process conducted in 2010 and early 2011, Kraton said in a news release.
Kraton opted not to extend the previously announced Framework Agreement with FPCC, which expired Sept. 30. The agreement had governed the formation of a proposed 50/50 joint venture to build, own and operate a 66-million-pound HSBC plant at FPCC's petrochemical site in Mailiao, Taiwan.
The project was delayed, first by the wait for environmental permit approval, Kraton said. After the permit was finally approved in July, FPCC considered the conditions to be too restrictive and limiting on its overall operation in Mailiao.
However, an Oct. 11 report from Taiwan's Economic Daily said FPCC was going to file an appeal by Oct. 12, after the environmental protection authorities once again rejected FPCC's proposal and indicated additional restrictions.
“We believe a significant amount of the engineering and design work conducted to date will be applicable to the alternate location,” said Kevin Fogarty, Kraton's president and CEO. “Moreover, given our significant liquidity and the strength of our balance sheet, we are well-positioned to develop and fund the project on a stand-alone basis.”
He added that Kraton will explore expansion projects within its current operating capability to possibly bridge, if necessary, the timing for the new stand-alone HSBC production.
The company noted it is “not possible to estimate with certainty” the project cost or the time line for an alternate, stand-alone location. It added that the options under consideration are within industrial sites where Kraton should have access to existing infrastructure and utilities, thus minimizing overall project expenditure.
Industry consultant Roger Young said the setback has significant impact on Kraton's capacity in the midterm. While Kraton's release mentioned China as one of the considerations, Young said concerns over intellectual property protection might rule that option out. “That is unless the China option offers an attractive supply of butadiene, a key feedstock for HSBC,” he said.
A Southeast Asia location, such as Thailand, Indonesia and Malaysia, is likely to be the final selection, Young said. He is Asia-Pacific vice president for Robert Eller Associates LLC.
Young also noted there is excess capacity of HSBC in the Asia region. Presently, most of the local production remains in commodity grades, and won't pose immediate threats to Kraton's large portfolio of specialty grades.
But Young said Asian producers are catching up, though it might take them five to 10 years. “They are getting into some of the specialty materials and doing things that are really out of the box,” he said.
During the third quarter, Kraton expects to incur a one-time pre-tax charge, not to exceed $10 million, associated with the write-off of a portion of the project costs incurred to date.