Novice Investing - GE Plastics Woes

Date: Monday 13th 2008f October 2008 10:42:32 AM

GE Plastics Woes - 01/25/2007

By: Hari Wibowo

General Electric Co. (GE) had recently put its plastic units on the block, citing high raw material costs. One of this raw material among others is Benzene. Just a brief introduction, Benzene is an aromatic compound which is obtained from the separation of crude oils. Of course, many things can be separated from crude oils. But aromatic compounds like Benzene is one of the main component of the plastics industry. For all of 2006, GE Plastics is producing revenue of $ 6.6 Billion with operating profit of $ 738 Million. Meanwhile, GE is reportedly

The following are the list of plants of GE Plastics that use Benzene as its raw material:
Styrene plant at Carville, LA (Capacity: 579 KiloTonnes/ year) Polystyrene plant at Selkirk, NY ( Capacity: 45 KiloTonnes/ year) ABS plant at Ottawa & Washington (Capacity: 310 KiloTonnes/ year) ABS plant at Grangemouth (Capacity: 52 KiloTonnes/ year) SAN plant in North America (Capacity: 145 KiloTonnes/ year) UPR plant in Chiba, Japan (Capacity: 5 KiloTonnes/ year)
I realize that GE may have some other plants that utilizes Benzene. However, it is true that price of Benzene in North America particularly, has been difficult for Benzene users like GE Plastics. In the beginning of 2006, crude oil stands at $ 62/ barrel and Benzene price was around $ 800 per Ton (T). Towards the end of the year, crude oil stands at $ 55/ barrel while Benzene price is higher at $ 1100/ T. Clearly, Benzene producer is making a lot of money here since the cost of their feedstock (crude oil) went down while their selling price is higher. Who would not want that?

Doing a little bit research reveals that Benzene producers in North America is controlled by several few producers, led by Exxon Mobil (XOM). Exxon Mobil alone accounts for as much as 20% total Benzene production. Combined with other big oil companies such as BP, Chevron and Shell, it may account as much as 75% of total Benzene production.

Now, doing simple addition reveals that total plant capacity of General Electrics that utilize Benzene is 1.136 Million Tonnes. On average, middle stream plastic products such as Styrene or ABS fetch around $ 1400/ Tonne currently. Therefore, these plants represents about $ 1.60 Billion in revenue for GE Plastics. (or 24% of total revenue)

It is not surprising that GE wants to get rid of this unit. You got 24% of your revenue at the mercy of your Benzene suppliers, which is controlled by Exxon Mobil. Not to mention that you cannot pass the higher price to your customers that quickly. Also, historically chemical plants has a slim profit margin with perhaps around $ 50/ Ton of profit. Potential suitors for this unit includes Dow Chemical Co. (DOW), Lyondell Chemical Co. (LYO), Saudi Basic Industries (SABIC) and others. These companies are more integrated than GE Plastics and they can withstand raw material increase better as they are less dependent than other companies for the majority of their raw materials.

With its empire in the financial, healthcare and aerospace business, it just makes sense for GE to abandon this field completely. For example, financial contributes to 50% of GE's operating profit. With $ 38.8 Billion of operating profit in 2005 alone, GE would not miss its plastic units contribution to operating profit (~ 1.9% )

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding General Electric Co. (GE) or any other securities.

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