Tio2 Financial

E.I. du Pont de Nemours and Co.: Titanium Dioxide

E. I. du Pont de Nemours and Company

FOUNDED IN 1802, DUPONT PUTS SCIENCE TO WORK BY CREATING SUSTAINABLE SOLUTIONS ESSENTIAL TO A BETTER, SAFER, HEALTHIER LIFE FOR PEOPLE EVERYWHERE. OPERATING IN MORE THAN 70 COUNTRIES, DUPONT OFFERS A WIDE RANGE OF INNOVATIVE PRODUCTS AND SERVICES FOR MARKETS INCLUDING AGRICULTURE, NUTRITION, ELECTRONICS, COMMUNICATIONS, SAFETY AND PROTECTION, HOME AND CONSTRUCTION, TRANSPORTATION AND APPAREL.

Titanium Dioxide (TiO2)Production and Manufacturing Process TiO2 is produced from either ilmenite, rutile or titanium slag. Titanium pigment is extracted by using either sulphuric acid (sulphate process) or chlorine (chloride route). The sulphate process employs simpler technology than the chloride route and can use lower grade, cheaper ores. However, it generally has higher production costs and with acid treatment is more expensive to build than a chloride plant. But the latter may require the construction of a chloralkali unit.

Competitive Advantages Du Pont has a few competitive advantages over its competitors as of 1972. Due to the size of the firm and its technological superiority, Du Pont has a dominant position in many markets. Du Pont also has a competitive advantage in the chloride process because of the recent enacted environmental protection legislation, which has made TiO2 production costs much higher. Du Pont will benefit from this because most of its production uses the ilmenite chloride process, which is much cheaper than the processes used by competitors.

Company Background  Diversified manufacturer of fibers, plastics,

industrial chemicals and other specialty chemical products  Conservatively managed company with longstanding AAA bond rating  Relied on retained earnings to fund capital expenditure programs  Organized into 10 industrial departments (second smallest being pigments)

Titanium Dioxide Market  White chemical agent used in manufacture of paints,

paper, synthetic fibers, plastics, ink and synthetic rubber  Manufacturing TiO2 involve sulfate process and chloride process  Projected sales expected to reach $340 million by end of 1972  Volume of sales had been growing at 3% per year over past decade  Sales projected to reach over 1 million by 1985

Capacity Decisions  Introduced ilmenite chloride technology at Edge

Moor plant in 1952 (only company with operational knowledge of this method)

Overview  In 1972, Du Pont found itself in a fortunate position as it was

faced with the following two options:  

Continue with its existing strategy and maintain its current revenue stream; or Modify its strategy and invest additional capital to increase its revenue stream in the future. As one can imagine, multi-million dollar investment decisions such as these are not easily made and require a tremendous amount of due diligence to include financial forecasting, labor ramifications, and extensive research.

Market Position Du Pont's position in the market was fortunate for several reasons. First, Du Pont was a leader in the Titanium Dioxide industry possessing the highest capacity for use of the ilmelite chloride process. Two recent developments in the industry, sharp increases in the cost of rutile ore required for the sulfite based process and the heightened environmental regulations enacted against domestic sulfur based plants made the ilmelite chloride process more attractive. Du Pont had a competitive advantage in the ilmelite chloride process accounting for approximately 60% of the total market production in 1970. This advantage was strengthened by the fact that the number two producer, NL Industries, was highly leveraged and the other producers in the market were relatively much smaller. This competitive advantage translated to an average pre-tax profit margin of 40% doubling that of its competitors in the industry. Therefore, the company could afford to cut prices as needed to keep future competitors out of the industry and maintain market shar

Incremental Cash Flow Statement for - Maintain Strategy

Incremental Cash Flow Statement for - Growth Strategy

NPV FOR MAINTAIN TRETEGY

NPV FOR GROWTH STRETEGY

Incremental Net Present Value GROWTH STRETEGY    

  1973

  1974

  1975

  1976

  1977

  1978

  1979

  1980

  1981

  1982

  1983

  1984

1985

Total Incremental EBIAT  $         (2.1)  $     (4.0)  $      5.8   $      9.1   $    19.7   $    25.2   $    30.3   $    43.7   $    60.2   $    74.1   $    88.6   $   101.7  $   119.1  ITC @ 10% 2.3 2.3 2.4 2.1 2.2 3.3 3.2 2.8 2.5 3.2 4.5 3.6 5.1 Incremental Inflow  $         0.20  $   (1.71)  $    8.23   $   11.20  $   21.90  $   28.52  $   33.48  $   46.48  $   62.68  $   77.26  $   93.08  $ 105.36  $ 124.21  Incremental Investment  $       22.50  $   23.18  $   23.88  $   20.64  $   22.29  $   33.38  $   32.25  $   27.68  $   25.08  $   31.70  $   44.77  $   36.13  $   51.32  Addition to NWC  $      (0.76)  $   (0.76)  $    8.39   $    3.28   $    9.82   $    5.66   $    4.78   $   11.79  $   13.29  $   10.63  $   12.89  $   12.07  $   16.16  Incremental Outflow  $       21.74  $   22.42  $   32.27  $   23.92  $   32.10  $   39.03  $   37.03  $   39.46  $   38.37  $   42.33  $   57.66  $   48.20  $   67.48  Terminal Value Incremental free cash  flow

$

(21.54) $ 24.13) $ 24.04) $ 12.73) $ 10.20) $ 10.52) $ (3.54) $

 $ 502.01  7.02 $ 24.31 $ 34.94 $ 35.42 $ 57.16 $ 558.73

MAINTAIN STRETEGY                                                       Total Incremental EBIAT  $            -     $        -     $    5.31   $    8.15   $   10.90  $   13.82  $   16.86  $   20.39  $   24.80  $   28.48  $   33.74  $   38.04  $   42.58  ITC @ 10% 1.35 0.927 0.955 0.983 1.1143 1.1473 1.29 1.3284 1.368 1.5262 1.694 1.6198 1.7962 Incremental Inflow  $         1.35  $    0.93   $    6.26   $    9.13   $   12.01  $   14.97  $   18.15  $   21.72  $   26.17  $   30.01  $   35.44  $   39.66  $   44.38  Incremental Investment  $       13.50  $    9.27   $    9.55   $    9.83   $   11.14  $   11.47  $   12.90  $   13.28  $   13.68  $   15.26  $   16.94  $   16.20  $   17.96  Addition to NWC  $            -     $        -     $    5.17   $    2.80   $    2.70   $    2.99   $    3.26   $    3.51   $    3.83   $    3.94   $    4.76   $    4.90   $    5.28  Incremental Outflow  $       13.50  $    9.27   $   14.72  $   12.63  $   13.84  $   14.46  $   16.16  $   16.79  $   17.51  $   19.20  $   21.70  $   21.10  $   23.25  Terminal Value Incremental free cash  flow

$ (12.15)

Cash flow differential

$

$ (8.34) $ (8.46) $ (3.50) $ (1.83) $

0.51 $

1.99 $

9.39) $ 15.78) $ 15.58) $ (9.23) $ (8.36) $ 11.02) $ (5.53) $

4.93 $

 $ 214.14  8.65 $ 10.80 $ 13.73 $ 18.56 $ 235.27

2.09 $ 15.65 $ 24.14 $ 21.69 $ 38.60 $ 323.46