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Eastman restructuring its PET business

Sharon Caskey Hayes • Oct 26, 2007 at 12:00 AM

KINGSPORT — It’s been the world’s leading supplier of PET for packaging for years. Now Eastman Chemical Co. plans to significantly shrink the business, divesting or shutting down much of its conventional PET processes and instead, investing in a new technology to produce the product.

The move will turn PET — Eastman’s largest business segment — into the company’s smallest segment by the end of 2008.

“And we will go from being the largest PET producer (in the world) to the third largest in the Americas,” said Eastman Chairman and CEO Brian Ferguson.

Ferguson and Richard A. Lorraine, senior vice president and chief financial officer, discussed the PET restructuring effort Friday in a conference call with Wall Street analysts.

PET — or polyethylene terephthalate — is used to make plastic packages and plastic containers. Eastman has been the world’s leading supplier of PET, but strong worldwide demand has attracted various competitors to begin producing the cyclical commodity. As a result, competitors have overbuilt PET capacity in Asia, Europe is crowded with producers, and North America is facing a time of oversupply and declining demand.

Today, PET — which represented 35 percent of Eastman’s sales at the end of 2006 — has become a drain on the company’s bottom line.

In the first quarter this year, PET product lines posted a $51 million operating loss, followed by a $13 million operating loss in the second quarter and a whopping $134 million operating loss in the third quarter.

Hoping to plug the leaks, Eastman sold its PET plant in San Rogue, Spain, earlier this year. And it’s in the process of divesting its PET plants in Mexico and Argentina.

Now, it’s looking to divest its remaining overseas PET plants — one in Europoort in The Netherlands, which was built in 1998, and another in Workington in the United Kingdom, which has produced PET since 1988.

Here at home, Eastman is taking steps to strengthen its domestic PET business, which is centered in Columbia, S.C. There, the company closed some of its older assets and opened a new plant based on IntegRex technology — a more efficient process to improve production and decrease cost.

On Friday, Ferguson said Eastman plans to increase capacity at the new IntegRex plant to more than 525,000 metric tons of PET by the end of 2008.

By that time, the company also hopes to reduce its cost structure at the Columbia site by more than $30 million to reflect the changes in the plant’s asset base, he said.

Ferguson said Eastman started the year with a capacity to produce 1.5 million tons of PET. By the end of 2008, the company will have removed 80 percent of its conventional PET processes, or more than 1.2 million tons of capacity.

Its remaining PET capacity will all be based in North America, and IntegRex will represent more than 60 percent of it, Ferguson said.

But Eastman’s new IntegRex technology is being challenged. Wellman Inc., a Fort Mill, S.C.-based chemical company that also manufactures PET, filed a patent infringement lawsuit against Eastman earlier this week, alleging Eastman is infringing on Wellman’s patent with the new IntegRex technology.

“Wellman is committed to active enforcement of its rights under these patents and remains committed to providing the high level of quality products and support services that our customers have come to expect,” states a Wellman release.

On Friday, Ferguson called IntegRex a “game-changing technology that could be viewed as being threatening to a lot of people.”

“This is supported by a very broad portfolio of R&D, extensive research and development,” Ferguson said. “We understand and know everything about the patent world as it exists out there. And it doesn’t surprise us that some people would want to challenge it. But we consider the pending claim to be without merit. And we will defend it vigorously.”

Traded on the New York Stock Exchange, Eastman’s shares closed Friday at $66.43, up 3.72 percent for the day.

The Kingsport-based company posted sales of $7.5 billion in 2006. It employs 11,000 people worldwide, including 7,500 in Kingsport.

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