Peter Jones - Grangemouth strike puts focus on competition at the top global levels

Published on Thursday 24 April 2008 21:39

BETWEEN the lines

UNGLAMOROUS, grimy, smelly, toxic, dangerous – because all those adjectives are associated with it, nobody in Scotland pays much attention to the chemicals industry. Yet it is a very valuable piece of the economic landscape. It generates 3.5 billion of output and produces 12 per cent of Scotland's manufactured exports, valued at 1.2bn.

Its 14,000 employees are mostly highly skilled and well-paid, earning an average 27,500 and producing a gross value added of 70,000 per employee. It is therefore exactly the kind of industry that Scotland wants for its economy to survive and flourish in the 21st century.

Right at the heart of it, however, is Ineos, owner of the Grangemouth petrochemical refinery and, all of a sudden, the hottest and most controversial news topic of the week. And it poses awkward questions for business and political leaders. Do we think it is a greedy profiteer bilking its workers of their due rewards? Or do we think it is a successful role model that other companies ought to be emulating? And is its business model the way ahead for the Scottish chemicals industry?

So what is the Ineos story? The reputation of Jim Ratcliffe, its founder, chairman, CEO and, reputedly, two-thirds owner, was made in the 1990s. He used his knowledge as a chemical engineer, gained from working with Esso and Courtalds, and then as a venture capitalist working with American-owned Advent International, to buy a BP speciality chemicals plant in Kent for 40m.

The 1992 deal, in which Ratcliffe was partnered by another chemist turned entrepreneur, John Hollowood, was done in a great rush. Hours before it closed, BP pointed out the new business had no name. They chose International Speciality Chemicals, shortened to Inspec.

In the next six years, Ratcliffe and Hollowood bought 15 other firms and chemical plants. But by 1998, they discovered that financiers did not like the mix of petrochemicals and speciality chemicals. Inspec was divided and the speciality side was subsequently sold to Laporte, a British firm, for 611m. Ratcliffe parted company with Hollowood and bought the remaining asset, a petrochemical plant in Antwerp for 90m. Following the romantic tradition established with Inspec, he named the new company Ineos – an abbreviation of Inspec Ethylene Oxide Specialities.

This was a time of great churn in the chemicals industry. The financial world did not much care for conglomerates or bulk chemical makers. Britain's great corporate crown jewel – ICI – fell victim to this City whim. Spooked by large purchasing of its shares by corporate raider Gerald Ronson, its board decided to sell its bulk manufacturing and concentrate on higher-value niche products. Other big chemical firms were doing much the same thing.

This was Ratcliffe's opportunity. Big corporate upheaval meant a huge array of potential acquisitions. His record of achieving a 17 fold increase in the value of Inspec meant that he was not short of eager lenders at Ineos. Since 1998, his company website lists 18 acquisitions in just ten years.

At first sight, a coherent strategy looks hard to discern. Ratcliffe himself has described it as "completely opportunistic" while his strategy director said in a 2001 interview: "You can't predict where you are going. It depends on what sensible transactions come forward. There is no vision about that."

Yet, there clearly was a method. Ratcliffe was primarily interested in assets, mainly but not exclusively in Europe and America, being sold by blue-chip companies because they had been deemed to be non-core. It did not matter whether they were related to existing activities; most, indeed, were standalone. But because of the provenance, most of the assets was reasonably well-equipped, had a significant presence in an established market, and had good management.

Ratcliffe's trick was to spot which chemical plants were under-performing and could be turned into high performers. In the 2001 interview, his strategy director exemplified the original Antwerp plant which made 125,000 tonnes of ethylene oxide and glycol. Capacity was raised to 145,000 metric tonnes immediately, and then substantial further investment pushed that up to 360,000 tonnes. "You can imagine what that does to the site's productivity. It is very much first-quartile. We are about equivalent to BASF and we surely have lower overhead than they do," said the director.

Repeating this trick has made Ineos Britain's biggest chemical company, while ICI has diced, dithered, dwindled and finally, disappeared into foreign ownership. Last year, PricewaterhouseCoopers reckons Ineos had sales of 18.1bn and profits of 727m. It has become the world's third-largest chemicals firm, behind only BASF of Germany and Dow of America.

Before the Grangemouth dispute blew up, you would have had no hesitation in describing it as a great British industrial success story. And if it had been based here, rather than down in Hampshire, it would have received all the business awards and accolades that Scotland can hand out.

But at Grangemouth, it faces two problems. Firstly, the company has risen on a pile of debt. Exactly how much is not known as the company is private. But it will be big and now rising in cost thanks to the credit crunch. The Grangemouth purchase, most of the 5.1bn BP Innovene deal in 2005 and now accounting for 18 per cent of Ineos' world revenues, will be a chunky part of that debt and its profits will be needed to service it.

The second problem is that in order to follow the company's established practice, cost-cutting and investment (750m is planned) will be needed to make the chemicals side of the business compete at the top level world-wide. Hence the dispute over the pension bill, now a quarter of the site's labour costs potentially rising to a half.

So, bearing in mind we want Scotland to be globally competitive, whose side are we on?

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