Specializing in Commodities

I was as astonished as anyone to learn that Saudi Basic Industries would buy GE Plastics in an $11.6-billion deal that was completed Aug. 31. But once I sat down and thought about it, I could see why this historic acquisition made sense. On the one hand, GE is a corporation with notoriously high standards of profitability. Its engineering plastics had been slipping gradually into the commodity zone—first ABS, then PBT and PPO-based resins. But the killer was when its polycarbonate business, the jewel in the crown, succumbed to “commoditization” because of a confluence of global trends, such as entry of new players, global capacity build-up, flattening of the CD/DVD market, and runaway inflation in chemical feedstocks.

SABIC, on the other hand, is comfortable with commodities. It started with oil and gas, the ultimate commodities. In the 1980s, it moved up a notch into more profitable commodity petrochemicals and plastics. It built plants for PE, PP, PS, PVC, and PET. SABIC then bought European polyolefins businesses from Huntsman and DSM. Now it moves up the food chain into the commodity end of engineering plastics. And SABIC has the advantage of being integrated back to the well, unlike GE. So it’s not hostage to petro-price swings that have battered non-integrated plastics makers.

While some resin producers appear to be backing away from businesses at the “commodity” end of the scale, others like SABIC are making a specialty of commodities—if you’ll pardon the paradox. They are aggressively building or buying capacity in materials susceptible to chronically thin profit margins and cutthroat competition. Their idea seems to be that to survive in commodities, you’ve got to be very big.

So you may be buying higher-volume resins from fewer, bigger, and more back-integrated suppliers. That may mean less competition, but probably also smaller swings in the inevitable price cycles. And you’ll have the added security of buying commodities from companies that actually want to be in that business.