ICI: alchemy or volatility?

ICI unveiled the second big step in the company's biggest shake up in its 71-year history when it announced the sale of its core commodity chemicals business last week to a rapturous reception in the City. The shares surged 15 per cent amid praise for the $3bn price tag and the wisdom of the strategic shift.

Yet as the dust settles, some are questioning whether the company has solved its protracted problem of earnings volatility - or whether the dramatic shift to the "lighter" speciality end of the chemicals business will expose it to volatility of another sort.

ICI said it would sell its industrial chemicals division - representing a third of its sales - to rival DuPont, exiting its most vexing business. Just nine weeks earlier, ICI approved a plan to pay $8bn for Unilever's far-flung speciality chemical businesses. There are more disposals to come.

ICI has all but guaranteed it will deliver consistent earnings growth when the Unilever assets are combined with ICI's increasingly profitable and growing paints division and its materials division, a consistent money- spinner.

"We expect to have very strong leadership positions and grow through outstanding selling skills and outstanding science," said Charles Miller Smith, the former senior Unilever executive appointed ICI chief executive in 1995.

Some analysts point out though that speciality chemical manufacturers, which process commodity chemicals for thousands of different "speciality" uses, have faced their own dramatic swings in profitability in recent years, particularly in Europe and the UK.

"If you look at the growth levels [in the Unilever businesses], they aren't all that special," said Michael Eastwood, chemicals analyst with Dresdner Kleinwort Benson.

The decision to exit bulk chemicals was "absolutely right as a textbook case," he said. But it is the smaller, more nimble speciality chemical makers in the UK such as Croda or Laporte that now offer better prospects. He said ICI shares rose largely on US investors buying "a restructuring story".

ICI had little trouble justifying its decision to dump its historic core business. Whiplashed by higher raw material costs, persistent market overcapacity and depressed prices, operating profit in industrial chemicals was a rollercoaster - down at pounds 265m pounds in 1994, up at pounds 496m in 1995, down again at pounds 109m in 1996, and threatening to drop as low as pounds 10m this year.

But the speciality chemical makers have also suffered a rough ride in recent years. Dramatic swings in prices for bulk chemicals like ethylene and propylene - base materials for many speciality chemicals - have caused havoc with earnings.

British Vita's profits and Brent International have both suffered from see-sawing profits in the last five years.

Miller Smith said it is wrong to lump ICI's new businesses into the same category, as many are international in scope. He allowed that raw materials costs or an economic downturn could impede growth, although he predicted good times ahead.

"Unless there is a big spike [in prices], the raw materials scene and the growth scene look better for the late 1990s," said Miller Smith. Forecasting demand, he said "really depends on what view you take on inflation and raw materials prices going forward".

Jim Leng, Laporte chief executive, said it is wrong to lump all speciality chemical makers into one market and make earnings forecasts based on a handful of criteria like commodity prices or economic conditions. Speciality chemical makers have the ability to deliver higher margins, since products tend to be more processed and may be covered by patents or other barriers that slow competition.

"Saying there are two sides of the chemical business, commodity and speciality, is like saying football is two teams," said Leng. "There are hundreds of sectors in the business with thousands of products."