Celanese's Specialty Materials and Low-Cost Acetyl Products Should See Long-Term Growth

Strategist

Seth Goldstein

Celanese is the world's largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. These products are used in the company’s specialized end products or sold externally. Celanese produces these commodity chemicals in its acetyl chain segment (roughly 65% of 2022 pro forma EBITDA including acquisitions), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. Celanese's Clear Lake, Texas, plant benefits from a cost advantaged feedstock from low-cost U.S. natural gas. The company plans to expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower unit production costs relative to other geographies.

The engineered materials, or EM, segment (35%) produces specialty polymers for a wide variety of end markets. Celanese is investing in the expansion of this business through acquisition. The company acquired Santoprene in late 2021 and acquired the majority of DuPont's mobility and materials portfolio in late 2022. Both deals add complementary products to Celanese's existing portfolio. Going forward, the EM segment should generate roughly 50% of profits in 2023 and grow to account for the majority of profits thereafter.

The automotive industry accounts for around half of EM segment revenue and nearly half of companywide end market exposure. Other key end markets include electronics and healthcare. EM uses commodity chemicals, such as acetic acid, methanol, and ethylene to produce specialty polymers. Celanese should benefit from automakers lightweighting vehicles, or replacing small metal pieces with lighter plastic pieces.

Celanese should also see growth from increasing battery electric vehicle adoption, as the company will sell multiple components specific to these powertrains. By 2030, we forecast 40% of all new global auto sales will be EVs, which will create an opportunity for Celanese to grow its automotive content per vehicle over time.

Business Strategy & Outlook

We award Celanese a narrow economic moat due to its cost advantage in the acetyl chain business, which generates acetic acid and downstream derivatives, and the combination of intangible assets and switching costs in the engineered materials business. 

We view chemical companies through the commodity processors moat framework. Chemical producers can generally earn a moat if they have a cost advantage in producing commodities, if they convert commodity chemicals into patented, differentiated products, which generates pricing power, or if they jointly develop customized products with their customers and this creates switching costs. We think Celanese’s acetyl chain business benefits from a cost advantage, while the engineered materials business benefits from the combination of intangible assets and switching costs.

Celanese has capital and operating cost advantages in its acetic acid production from economies of scale and lower feedstock costs that we expect to prove durable. Celanese has built some of the largest acetic acid facilities in the world at 2.0 million tons of capacity compared with the average 0.5 million-ton plant. Celanese's plants exhibit economies of scale, allowing them to spread capital costs and fixed operating costs across greater production volume. The overwhelming majority of the company's facilities use low-cost feedstock, including natural gas in the United States and coal in China, whereas higher-cost producers typically use oil-based naphtha feedstock. Although the acetic acid cost curve is relatively flat, Celanese's position is firmly at the low end of the cost curve, which has allowed the firm to generate consistent economic profits over time.

Celanese's primary input costs are methanol and ethylene. Methanol prices are tied to higher-cost natural gas prices in Asia, which is the marginal cost feedstock. Similarly, ethylene is linked to oil prices, as oil-based naphtha is the marginal cost feedstock. Because Celanese’s primary feedstock is U.S. natural gas, the firm’s profits are tied to the spread between U.S. natural gas and both oil and Asian natural gas. We expect these spreads will remain favorable for U.S. natural gas over our five-year explicit forecast period, which should benefit Celanese due to the company’s access to low-cost feedstock. Further, as the company increases the proportion of its low-cost, U.S.-based acetic acid production, its costs should decrease, further supporting higher profit margins. Although Celanese is expanding its downstream portfolio in an attempt to increase its portion of specialty chemicals, we ultimately think the company’s feedstock advantage will drive excess returns. Further, by expanding its downstream portfolio, Celanese should be able to run its acetyl chain plants at higher capacity utilization rates, which should help this business generate solid profits even during an economic downturn. 

The company's engineered materials segment benefits from the combination of intangible assets and switching costs. While this segment has historically been more commoditized, the acquisition of Santoprene from ExxonMobil in 2021 and the DuPont mobility and materials portfolio in 2022 shifted this segment toward specialty products. This business produces patented specialty polymers used in automobiles and medical devices, which combined generate the majority of revenue. Autos is the largest end market at roughly 50% of segment sales. Celanese develops customized polymers closely in conjunction with its customers and often receives the mandate to be the sole supplier for a piece of equipment, which can range from a plastic gas tank or electric vehicle battery separator to the plastic in an asthma inhaler or hip replacement. Automakers work closely with suppliers because each part is designed for specific vehicle models. As such, automakers rarely change suppliers during a vehicle model’s life cycle, which typically spans 6-13 years, including development. Medical device manufacturers must go through extensive testing of their products, so they don't often change suppliers of key components. Further, Celanese’s products receive regulatory approval included in the medical device. This makes Celanese a preferred supplier for generic medical device producers as using inputs that have already received regulatory clearance reduces regulatory risk for the generic producer. These dynamics support switching costs for the majority of segment sales. To support our view that this business benefits from switching costs, the EM segment has historically been able to hold prices better versus commodity chemicals even when input costs are falling.

All in all, we think Celanese has a narrow moat because of its low-cost acetic acid production in the upstream acetyl chain business and the combination of intangible assets and switching costs in the downstream engineered materials business and we’re confident the company will be able to outearn its cost of capital over the next decade.

Narrow

Economic Moat

Celanese

Celanese Corp. engages in the provision of technology and specialty materials businesses. It operates through the following segments: Engineered Materials, Acetate Tow, Acetyl Chain and Other Activities. The Engineered Materials segment includes the engineered materials business, food ingredients business and certain strategic affiliates. The Acetate Tow segment serves consumer-driven applications and is a global producer and supplier of acetate tow and acetate flake used in filter products applications. The Acetyl Chain segment includes the integrated chain of intermediate chemistry, emulsion polymers and ethylene vinyl acetate (EVA) polymers businesses, based on similar products, production processes, classes of customers and selling and distribution practices as well as economic similarities over a normal business cycle. The Other Activities segment consists of corporate center costs, including administrative activities such as finance, information technology and human resource functions, interest income and expenses associated with financing activities. The company was founded by Camille Dreyfus and Henri Dreyfus in 1918 and is headquartered in Irving, TX.

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