European Plastics News considers the hard task facing Klesch, which acquired Arkema's vinyls business in December 2011. Klesch says it will not close plants and expects to leverage its expertise in electricity and ethylene, two key inputs to PVC production.

One of Europe's big three PVC producers, Arkema, is walking away from the vinyls sector. The group has agreed to transfer its troubled vinyls business to the Switzerland-based investment firm Klesch Group and will focus on its profitable specialty chemicals business.

The deal means Arkema's 2011 results will show exceptional net expenses of around €470m. This includes €100m to reflect a cash amount it will place on the balance sheet of the divested entity.

The unfavourable financial terms are a sign of the problems Arkema has faced with its vinyls business: repeated industrial action at its French plants, as well as a downturn in the European PVC market.

Following the PVC price fall in late 2008, Arkema's vinyls business recorded EBITDA losses of €31m in 2009 and €14m in 2010. For the first three quarters of 2011, it just scraped a profit, with EBITDA of €2m. Numerous strikes have also interrupted the group's PVC production over the last two to three years. They flared again in November when the deal with Klesch was announced.

Arkema tried to reduce operating costs rather than take the drastic action of closing plants. Will Klesch be bolder with the unions and shut down some facilities to make the business more profitable?

"We have no plans to close plants," Klesch Group told European Plastics News in reply to our enquiries. "Our focus going forward will be to reduce input costs through tendering and group purchasing initiatives, and improve efficiency through targeted capital expenditure."

Mike Smith, CMAI's European chlor-alkali and PVC analyst, says Klesch has a difficult job taking on the legacy of strikes in France. In his analysis, he believes Arkema has lost PVC market share in France due to the force majeures it has had to declare, and this has benefited its two big PVC rivals, Ineos and SolVin, which have won more business.

However, Klesch says: "The [Arkema] business has not lost any significant customers over the last two years. Our job going forward will be to avoid/prevent/minimize future 'force majeure' events."

The Swiss group says the vinyls business will complement the operations it has previously acquired in oil refining, aluminium, transport and commodity trading. These operations generated more than €3bn in sales in 2010.

"Through its existing investment platforms, Klesch has significant expertise in the power and ethylene industries, the knowledge of which will be critical to efficiently producing vinyl products and which will be of benefit as the business is assimilated into the Klesch Group," the group said in a press release.

Electricity and ethylene are major purchasing costs for PVC producers. Klesch owns the former Shell refinery in Heide, northern Germany, but Mike Smith at CMAI says its ethylene output is relatively small. Klesch will have to secure good ethylene prices from its suppliers to help reduce costs, he says.

European Plastics News asked Klesch what its plans are for ethylene supply to the PVC plants. It replied: "The business currently purchases ethylene from three suppliers, including Total. For the time being, these supply arrangements will remain in place."

Klesch is taking over the Arkema business at a time when the outlook for the PVC market is poor. PVC demand in Europe is particularly weak in the short term, with the construction market languishing, and applications for PVC in packaging expected to dwindle due to substitution by other polymers.

In CMAI's recent monthly report, it is forecasting that PVC demand in western Europe will not change much from the second half of 2011. It expects quarterly demand of around 1.4 million tonnes in Q1 and Q2 of 2012, slipping to below 1.3 million tonnes in Q4.

In its 2012 World Vinyls Analysis, CMAI says oversupply in the global vinyls market may persist until 2013. Mike Smith puts it bluntly: "PVC is in a stagnation phase, if not a decline phase, of the product cycle."

The implications for PVC producers are that they will have to reduce costs further to remain competitive otherwise, they may succumb to a takeover.

Last year, Tessenderlo sold its PVC resin and chlor-alkali business to Ineos and Vinyls Italia sold its plant in Ravenna, Italy, to Industrie Generali.

Ineos has led vinyls consolidation in Europe up to now. Smith points out it has an advantage in also being an ethylene supplier.

Will Klesch join Ineos and buy more vinyls companies? The Klesch answer is: "We will most likely only look at future acquisitions which would enhance the business either in its product range or its geographical reach."