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Business

Eastman's Initiative

Company is betting on technology to lower costs and drive growth

by William Storck
November 27, 2006 | A version of this story appeared in Volume 84, Issue 48

Pet Project
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Credit: Eastman Chemical
Eastman's just-opened polyethylene terephthalate plant in Columbia, S.C., uses new, lower cost technology.
Credit: Eastman Chemical
Eastman's just-opened polyethylene terephthalate plant in Columbia, S.C., uses new, lower cost technology.

Eastman Chemical is banking on technology changes to boost its financial performance. At a meeting with securities analysts in New York City earlier this month, the Kingsport, Tenn.-based firm outlined initiatives in its polyethylene terephthalate (PET) and coal gasification operations designed to cut costs, expand markets, and increase its bottom line.

Chief Executive Officer J. Brian Ferguson told meeting attendees that as a result of the programs, "performance in the next five years will be meaningfully better than in the past five.

"We are taking some very transformational actions in the PET business," Ferguson said. "In 18 months or so, we are going to get this business to a 10% operating margin." This would be more than a fourfold increase from the 2.3% operating margin seen in the first nine months of 2006.

Ferguson and his colleagues have several gripes with the PET business today. Gregory O. Nelson, vice president and head of Eastman's polymers business, said: "Asia is overbuilt in a major way; Europe is crowded with producers; North America is entering a time of oversupply." If that weren't enough, Nelson told the analysts, p-xylene, one of PET's main raw materials, has supply-and-demand problems that have led to major volatility.

The core of the transformation of Eastman's PET business is the firm's IntegRex technology, which, according to Nelson, "changes the rules of the game starting right now." A 350,000-metric-ton-per-year IntegRex PET plant in Columbia, S.C., was mechanically completed in October and will be fully operational in early 2007.

Compared with a conventional facility, Nelson said, the plant has twice the capacity on half the footprint. Thus, its capital cost per pound of capacity is 50% that of a conventional plant.

The new technology, according to Nelson, also makes possible a next-generation PET resin that Eastman is calling ParaStar. This resin, he said, requires less energy to be converted to bottles and other forms of packaging, has better bottle-to-bottle consistency, enhances the ability to make lighter weight bottles and packaging, and is fully recyclable in existing facilities.

The new plant won't add much to industry capacity, Nelson maintains. When fully operational, it will increase Eastman's North American capacity to 1.18 million metric tons, but the company will close an equal amount of older capacity. Nelson said Eastman has already found ways to debottleneck the new plant, adding another 100,000 metric tons to its capacity. When the closures and debottlenecking steps are completed in 2008, Eastman's total North American capacity will be 925,000 metric tons, with about half at the IntegRex unit.

Ultimately, Eastman wants to convert all of its North American PET capacity to IntegRex technology. Nelson said Eastman is currently investigating, with local partners, the feasibility of building a world-scale PET plant close to an integrated oil refinery. "The combination of our lowest cost purified terephthalic acid and PET with lowest cost p-xylene from a refinery would create a compelling value that is nearly impossible for others to replicate for a long time."

Although Ferguson is bullish on the PET initiative, he told the analysts that modifications taking place in Eastman's coal gasification segment "will be a more significant transformational change than what we're doing in the PET world."

According to Ferguson, about 20-25% of Eastman's product volumes are manufactured from coal, and that 20-25% generates between 50 and 75% of the firm's earnings in a typical year. "Over the next five years, we should be able to increase that 20% ratio to something like 50%," he said.

Mark J. Costa, senior vice president for corporate strategy and marketing, explained that most of the cost of making chemicals comes from oil-based raw materials whose rising costs producers can't control or easily pass on to customers. "You're sort of stuck in a squeeze play between the big-box retailers, who won't give you any relief, and the big oil majors supplying a lot of your raw materials," he said. "Our whole program is aimed at pulling away from the supply side of that constraint. We're pretty certain that coal is not going to go rocketing upward."

Eastman expects its first new coal gasification plant to open on the Gulf Coast in about five years, producing methanol from synthesis gas. Methanol from Eastman's existing gasification operation in Kingsport is used to make acetic acid and derivatives. In contrast, Costa said, the new facility will supply methanol to Eastman's Longview, Texas, facility for conversion into propylene via a mix of in-house and licensed technologies. Such a process would be unique in the U.S.

In another departure from standard practice, the gasification plant will not be majority-owned by Eastman, but by financial partners. "Basically, if you're an investor in the coal gasification project," Costa said, "we'll provide project development services, and the insights and technical services we have for operating the facility. In exchange, we will take the synthesis gas and methanol at long-term prices."

Also under consideration, but further in the future, is an ethylene glycol plant based primarily on the same model.

According to Ferguson, the announcements made during the meeting are evidence that the North American chemical industry is far from dead. "You have to make some changes, but you can compete head-to-head with people who are perceived to be the most advantaged in the world today," he said. "And not only can you compete from a cost position, you can be sitting in the market that everybody wants to serve."

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