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Solvay: Adjusting soda ash footprint – rating lowered

Solvay: Adjusting soda ash footprint – rating lowered

18.12.2012 9:21

This morning, Solvay announced a plan to adjust its global footprint in soda ash. Solvay has nine production plants, located in 8 countries (Bulgaria, Egypt, Germany, France, Italy, Portugal, Spain and the US).

In Southern Europe and the Mediterranean region, the market is faced with lower demand and increased competitive pressure from Turkish capacities. Solvay indicated it is examining solutions to adapt its manufacturing footprint in the region and the company will implement an appropriate action plan by mid 2013.We would expect that the Southern European plants (Italy, Spain and Portugal) seem most at risk for restructuring/mothballing/closure.

Solvay also announced to expand production capacity of its US plant (Green River, Wyoming) by about 15%, with limited capex involved. We believe a significant part of the expansion is for export purposes, principally to South America.

Our View:
The press release is not very precise about the restructuring initiatives in Europe, as we believe measures will depend on the outcome of discussions with works councils. We would expect that expansion of US production capacity will offset capacity reductions in Europe and hence we expect Solvay to remain by far the largest soda ash producer worldwide. Solvay currently has about 7.5m tonnes annual soda ash production capacity, ahead of Tata (~5.5m t), FMC (~4.5m t) and Oriental Chem (~3m t).

Discussions of soda ash price negotiations for 1H13 are still ongoing, although some industry consultants seem to indicate settlements that gofrom a rollover to a € 10/ton price increase. We already expect 2012 to be the best year for Essential Chemicals (of which Soda Ash represents about 45% of revenue) in the past five years (which is the period on which separate business unit level reporting is available), and based on the pricing comments above we would expect 2013 to be another good year for Soda Ash.

After the hefty share price rally since our upgrade from Hold in January 2012 (at share price of € 65.01), we now feel that the upside potential has become more limited. Hence we downgrade the stock from Buy to Accumulate while we decided, on the back of our DCF model, to increase our target price from € 105 to € 112.

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