Westlake – Another Interesting Move – Vinnolit
We have written about some of the opportunities to move the US shale advantage to Europe. While they are limited, they revolve around cost effective ways of moving low cost molecules from the US to Europe – or other parts of the world. The optimal solution is to move something with as much US cost advantage as possible in the manufacturing process in a form that is also cost effective to ship.
Whether or not Westlake has plans to move US based PVC feedstocks to Europe to support its Vinnolit acquisition, it is this product chain which in our view provides the greatest economic opportunity. Both ethylene and chlorine in the US have significant cost advantages versus Europe and EDC (ethylene di-chloride), as a liquid, is relatively inexpensive to transport – see associated research, from which the chart below was created. Simply put, you can add more value to a European producer (on a ton of ethylene basis) by moving EDC from the US to Europe than by moving anything else.
Like everything, it is not quite that simple, as to move from EDC to PVC you either need more ethylene or you need to be able to dispose of hydrochloric acid (depending on your process), but these are issues that can be overcome if the economics are good enough. As we have indicated in the past, it will be far easier and more stable for the European market to move 200,000 tons of PVC raw materials to Europe – to one consumer than to try and sell 200,000 tons of PVC into an oversupplied market – in transactions for a few thousand tons each, at best.
Alternatively, Westlake may be able to achieve better economics without shipping anything, given that at least one of Vinnolit’s current ethylene suppliers in Europe has a large US presence and there may be the ability to swap product in the US for products in Europe.
Whether or not this is what Westlake plans – in large or small volumes – it is only one of several reasons why this transaction looks interesting:
- Timing – we have written recently that across all industrial and material sectors Europe appears to have turned. While the growth rate might not be high, it is positive rather than negative.
- Valuation – Westlake is picking up the business for a good price – a fraction of what the replacement value would be. This is a function of European profitability over the last few years.
- Consolidation: the European PVC market has been horribly fragmented and we are beginning to see signs of change with Ineos and Solvay combining forces. There are other assets that Westlake should look at in Europe, but even without them Westlake is likely buying into a better market structure than existed previously.
- Technology: Vinnolit has some interesting specialty PVC products in Germany and in the UK and there will be opportunities for Westlake to expand sales of this product line in the US and possibly Asia.
This move, in addition to the recently announced MLP split, shows that WLK is very focused on creating value. The stock has had an extraordinary few years, but the company has always been a great steward of its capital and cash, and continues to think outside the box.
While we might bet against the ethylene cycle and a long term high price differential between US natural gas prices and global crude oil prices (we are comfortable with the medium term), we would not bet against WLK within those confines. The likely MLP yield supports owning the stock even at current levels, though it does not support a lot more upside.