Materials firm Ineos Olefins & Polymers USA's acquisition of pipe maker WL Plastics Corp. brings it a “captive” downstream customer of its increasing polyethylene production.
Fort Worth, Texas-based WL has more than 500 million pounds of annual high density PE pipe production at plants in Kentucky, South Dakota, Utah, Texas and Wyoming. An additional plant in Georgia is under construction. WL ranked 11th in Plastics News' most recent ranking of North American pipe, profile and tubing makers with annual sales of $340 million.
Ineos is in the process of adding almost 1 billion pounds of new HDPE capacity in LaPorte, Texas, through a joint venture with Sasol Ltd. Having a “captive” customer downstream is a good strategic move, market analysts said, especially considering that others are pumping up PE production.
Between Ineos, Braskem Idesa and Nova Chemicals, some 4 billion pounds of extra PE capacity should be available by the end of 2016.
The capacity increase is expected to continue into 2017 with an additional 7 billion pounds of PE capacity from Dow Chemical, ExxonMobil Chemical and Chevron Phillips Chemical (CPC).
By acquiring WL Plastics, Ineos gets “a captive base in HDPE pipe, which sells at a premium with a volume just about equal to their share of the JV expansion with Sasol,” Robert Bauman of Polymer Consulting International Inc. said in an email.
“In Ineos's case, the potential for selling as much as a half billion pounds or more of HDPE to an internal customer, such as WL, is effectively a half billion pounds or more that they will not have to find a home for in what is looking to be a dog-eat-dog PE market,” Phillip Karig, a managing director at St. Louis-based Mathelin Bay Associates LLC, said in an email.
“On the downside,” Karig continued, “there is at least a small risk that some of WL's competitors will look to move their current Ineos HDPE purchases to other resin producers that do not produce pipe.”
Nick Vafiadis, vice president of plastics for IHS Chemical, called the acquisition an “interesting development” and pointed to another instance of a PE producer integrating downstream.
“CPC is already in this space with Performance Pipe so other producers may see this as an option that helps them remain competitive in the domestic market while providing an outlet to deliver their technologies,” Vafiadis said in an email.
The vertical integration of resin suppliers and pipe manufacturers isn't a new concept. Most recently, in 2014, Mexichem SAB de CV bought Dura-Line Corp. Also, Westlake Chemical Co. owns North American Pipe Co.
“The idea that such an integration allows for an outlet for resin can be a major driver for such a decision,” Tony Radoszewski, of the Plastics Pipe Institute, said in an email. “But it can also help during various business cycles.”
For example, when the onslaught of all the announced capacity comes on stream, Radoszewski said there most likely will be downward pressure on resin prices.
“Having a value-added outlet for that resin can help in the overall financial health of the parent company,” he said. “That, of course, is based on the assumption that the pipe market is not in a down cycle as well. That would be a case where both resin and pipe are in oversupply positions. The idea is that most of the time one is better than the other. Of course, when both products, resin and pipe, are in tight supply, revenues can be greatly enhanced on both sides.”
Globally, the plastic pipe market forecast calls for a compound annual growth rate of 6.8 percent to 2020 with demand for PE pipe experiencing the highest increase, according to Lucintel, a market research firm. In North America, growth is being driven by residential construction and replacing aging pipelines made of traditional materials with plastics.
Ineos O&P USA CEO Dennis Seith said in a Nov. 1 news release that WL “is well positioned to serve the growing North American pipe market and will complement Ineos's existing portfolio of olefins and polymer products.”
WL provides HDPE pipe to markets including oil, gas, industrial, mining, conduit, and municipal water and sewer.
“We believe ownership under Ineos will enable WL to strengthen our position in the marketplace through upstream integration backed by the resources of a global company enabling the next phase of WL Plastics' growth,” WL CEO Mark Wason said in the release.
Having a parent company with financial resources may allow for capital expenditures in manufacturing that WL couldn't make on its own, Radoszewski said.
“As extrusion technology continues to evolve and improve, having the most productive equipment available helps to make the pipe company a more efficient or lower-cost producer compared to competitors,” he explained.
There also could be more capital available for marketing, advertising and trade shows.
Another benefit of the acquisition could come in the form of resin development. Ineos will be able to test and evaluate materials internally without worrying about non-disclosure agreements, Radoszewski said.
What about the effect of the deal on the competition? That's the million-dollar question, according to Radoszewski. Three HDPE pipe companies — Performance, Dura-Line and WL — are now owned by resin producers and have multiple locations across North America. So it's likely it will be a challenge to compete with them.
“Regional manufacturers will see a different landscape and will have to focus on their value proposition to their customers,” Radoszewski said. “This could be faster service, better local delivery, ability to make special runs, etc. It can also encourage them to look at new pipe structures, like multi-layer or composites, that the larger companies may not be inclined to focus on.”
How it all shakes out will be dependent on the market conditions created by the new resin capacity and the relationships between the smaller and regional manufacturers and the resin suppliers that don't have pipe subsidiaries, Radoszewski said.
Ineos O&P is a unit of global materials firm Ineos Group AG of Rolle, Switzerland. Its North American assets include 1.75 billion pounds of annual HDPE production in LaPorte, Texas.
News of the deal for WL came only a day after Ineos — through its Ineos Styrolution unit — announced that it was acquiring the global K-Resin styrene-butadiene copolymers (SBC) business of Chevron Phillips Chemical Co. and Daelim Industrial Co. Ltd. for an undisclosed price.