What Will “Value” Investors Make of Solvay’s Soda Ash Transition?

There’s a bit of a theme emerging in the chemical industry when it comes to sustainability. Companies trying to improve their environmental footprint will simply offload an energy- or emissions-heavy business to improve their credentials. In some cases, it’s a matter of finding a buyer with a thick skin and a desire to milk the polluting asset for whatever life it has left.

Solvay is taking a different route, with some of the same risks.

Five months ago, CEO Ilham Kadri unveiled a broad roadmap for Solvay to reach carbon neutrality by 2050. The plan included an EU1 billion investment to replace coal at its soda ash business, Solvay’s biggest source of CO2. In a flying start, Solvay already has alternative fuel plans for three of the six plants. Then came news yesterday that the 159-year-old company is breaking up.

What this means for soda ash’s energy transition isn’t clear. Soda ash will be part of a separately listed commodity-chemical business containing low growth but money generating assets. By Kadri’s own admission, it will appeal to “value stockholders.” Typically, these are investors with a penchant for cash cows. The danger is that, emissions-wise, they could favour the financial type (dividends) over bankrolling an energy transition to cut CO2.

Kadri maintains there will be no wavering over completing the energy transition at soda ash. Current events in the energy markets highlight the need to de-risk inputs so the fuel-switch makes sense from both environmental and financial standpoints. Spread over so many years, the EU1 billion investment amount is manageable for such a cash-generating operation, she added. Plus, customers want to reduce their Scope 3 emissions and the listed commodity chemical business will have other assets making bicarbonate, peroxides and solvents.

“This isn’t the end,” Kadri said. “Obviously the new management team and the board will rule post split but we will set them up for success, including for the energy transition.”

Kadri is looking to set free the faster-growing specialty ingredients, composites and polymers business, though soda ash is where it all began in 1863, when Ernest Solvay discovered a synthetic manufacturing route using limestone and salt brine.

A key component of glass, soda ash is one of life’s bare necessities. It lowers the melting temperature of sand and alkalises the molten material for easier shaping. There’s a myriad other uses, from household detergents to water treatment. The fact of the matter is there isn’t enough natural trona to go around. The one mega deposit in Wyoming should last at least a century or two, and a much smaller one in Turkey an estimated 40 years. Then there’s Mongolia, but production there is dedicated to the Chinese market.

That means synthetic soda ash is here to stay and it will likely account for 70% of the market longer term. It has to get cleaned up, whoever runs the shop.

Currently, the job falls to division head Philippe Kehren, someone who has been working on energy sourcing and greenhouse gas projects since the early 2000s. In an interview prior to Solvay’s breakup announcement, Kehren said all soda ash’s “low-hanging fruit were harvested 5 or 10 years ago.” There was a big productivity program that ended in 2015 and small non-competitive sites in Portugal and Egypt were shut down.

From hereon, things are much more complex, and when the commodity-chemical business lists in France and Belgium sometime in the next year or so, investors will need to get on board with that. Will value investors have the stamina for it?

“It’s a long journey and we don’t have all the answers,” Kehren said.

The challenge is finding local energy, whether it be waste wood, refuse-derived fuel or sunflower pellets, as shipping-in coal is not an option going forward. Whatever the fuel, soda ash made in Europe has to be competitive on price if Solvay is to battle it out in the growth markets of Asia Pacific, Latin America, the Middle East and Africa.

There’s no room for any additional CO2 costs, Kehren said. Synthetic soda ash is going up against very low-energy, solution-based natural trona mining in Turkey. Cheaper than mechanical mining, the technology is increasingly being adopted in the US, which can produce twice the amount of soda ash it needs domestically.

“These energy transition projects are critical in terms of competitiveness because we can’t only value them in terms of CO2 emission reduction,” Kehren said.

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