Solvay Is Splitting
Purer plays are here to stay
Welcome back to the newsletter. It’s the last Friday in March and per my usual schedule this one is all about the financial implications of the chemical industry and today I’m focused on Solvay. I tried to get a job at Solvay when I was in graduate school and if I had been successful I’d probably be working for SpecialtyCo now.
This issue of the newsletter is sponsored by:
The Distillate Of The Story
If you read the chemical news as much as I do, you probably know that Solvay, the Belgian specialty chemical maker, announced a split of its business into two entities: SpecialtyCo and Essential Co. Mike McCoy had the story for C&EN and included an interesting tidbit from a Jefferies analyst noting that the split proposal is a sign that Solvay was unable to sell its soda ash business that it had been shopping around. But who is Solvay and what’s with the weird name?
The History Of Solvay
The Column noted that Solvay derives its name from the Solvay process, which displaced the Leblanc process, for making soda ash. There are two methods of making soda ash, the first is the natural route which is through extraction of naturally occurring soda ash and accounts for about 30% of global production while the second route is the synthetic route, also known as the Solvay route, which uses sodium chloride and limestone and coking coal in the presence of ammonia. Solvay was founded in 1863 based on their new synthetic route to soda ash.
In 1863 making synthetic soda ash was a redefining chemical process. Instead of having to mine soda you could just make it out of ammonia, salt, and coal. In 1905 Fritz Haber and Carl Bosch would figure out how to make ammonia from air. By the 1940s the chemical industry was changing the world and how humans lived on it.
About half of the produced soda ash is used to make glass and the rest is used in a variety of other industries such as soaps, detergents, batteries, metallurgy, and it’s used to make sodium bicarbonate–the stuff that makes your chocolate chip cookies rise and high school science volcanoes erupt (when mixed with vinegar obvi). Making synthetic soda ash does involve coal, and coal is a dirty fossil fuel right? But glass is really important, especially for construction of commercial and residential buildings, but it’s also used in making glass fiber for composites.
If the name Solvay was synonymous with making soda ash then in the late 2000s and early 2010s the shareholders went on a mission to do good in the world and make the name Solvay synonymous with environmental sustainability and corporate governance. In 2009 Solvay divested their pharma division to Abbot for 4.5 billion euros. The company, flush with cash, then bought Rhodia in 2011 for $4.8 billion and this was arguably Solvay’s first foray into the specialty chemicals business.
At the time Rhodia was heavily into consumer chemicals, advanced materials, and polyimides, but it had legacy issues of soil pollution from when it was Rhône-Poulenc. Rhodia also violated the clean air act in 2007 and settled with the EPA to pay a $2 million penalty and spend $50 million on air pollution controls at 8 production facilities that made sulfuric acid (a commodity chemical). Today, Solvay has a soil treatment business.
A Message From My Sponsor
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Composites Time
In 2015 Solvay bought a lean Cytec Industries, which had just spun-off its phenolic and coatings business as Allnex in 2013. In 2015 Cytec was an industry leader in making composite resins, a true specialty chemicals business, and composites were being used in everything from automobiles to airplanes to golf clubs:
Headquartered in New Jersey with 4,600 employees across the globe, Cytec generated sales of US$ 2.0 billion and a 20% REBITDA* margin in 2014. It sources almost half of its sales from North America, nearly a third from EMEA and the remainder from Asia Pacific and Latin America.
Composites were being used to lightweight cars and planes to make them more fuel efficient. These materials were going into the all electric BMW i3, Hexion was supplying the resins, and composites were a great story about how polymer chemistry was enabling sustainability. I think at this point, shareholders of chemical companies could brag about their investments on the golf course.
I think in some sense the shareholders of Solvay wanted their business to do good for the world (this is my speculation), but if your industry has been “the bad guy” for decades (I think it was largely self-inflicted) at some point I think you want to be the hero. In 2012 Solvay would show off their glycerol to epichlorohydrin process, the first biobased route to a critical chemical that enabled composite resins, by building a plant in Thailand. In 2019 Solvay would appoint Ilham Kadri, a PhD polymer chemist, as CEO of the company (also previously worked at Cytec) and is one of a handful of female CEOs in the chemical industry.
If polymer chemists worldwide were going to have a badass business role model I think Ilham Kadri would be a good one.
During Covid-19 Solvay took 16 million euros and gave it out to its non-executive employees as a show of appreciation. If we split that equally among the 24100 employees it’s about 600 euros per employee. That’s more than most chemical industry employees got during Covid while going into the labs and plants to keep the business going.
Time To Land The Plane
I went into all this history of Solvay because I think this move to split the company is to try and deliver shareholder value in the form of delaying lawsuits and liabilities and giving shareholders the ability to fine tune their portfolios. Originally, the whole move into specialty chemicals was driven by shareholders to diversify away from the commodity chemical business during the Rhodia acquisition (despite liabilities). Cytec was a big double down on specialty chemicals.
Having both commodity and specialty chemicals businesses is not how the modern chemical industry works though. It’s all about pure plays. DuPont is evolving. Hexion split apart. Huntsman is being slowly changed by shareholders. The age of the chemical conglomerate is over”
The age of the wide business portfolio conglomerates appears to be over and companies have organized themselves into purer plays that are specific to different end markets. This is because it gives shareholders better control over their portfolios. Instead of just being in chemicals they can target specific markets where they think there will be growth.
If, as a shareholder, you want to own that soda ash and commodity chemical business without having to support all these forays (in the form of spending cash) on trying to do good for the planet then EssentialCo might be the one to hold. Or perhaps you are the shareholder that thinks there is no growth in commodity chemicals and you want to only own potential for growth and you might see composites and the other SpecialtyCo business as the one worth keeping.
Now shareholders have a choice. Until we hit the next specialty chemical cycle and I suspect we start the whole process over again. Who will invent the next Solvay process?