Operational excellence The gas cleaning system for the chromic oxide plant at Eaglescliffe, UK will further enhance environmental performance standards.

Operating profit before exceptionals was £4.0 million, compared to £23.7 million in 2000, on sales down 4 per cent to £126.9 million. On a constant currency basis, sales decreased by around 7 per cent. Operating loss before exceptionals in the second half of 2001 was £0.2 million, compared to an operating profit before exceptionals of £11.7 million in the second half of 2000, on sales down 11 per cent.

The business estimates that the global chromium chemicals market fell a few per cent in volume terms year on year, the decline taking place in the second half of the year. Demand was lower for all product categories with the exception of chromic oxide for use in metal alloys.

Elementis Chromium sales volume fell by 9 per cent year on year, with second half volume being 15 per cent lower than the comparable period in 2000.

Sales volumes were lower year on year for all product categories, reflecting increased competition, mainly from Former Soviet Union producers, and reduced demand. The best performing product category was chromic acid, which continues to benefit from the success of the superior handling properties of our CA21™ product. Sales volumes of CA21™ increased by around 15 per cent year on year, almost all of which was achieved in the first half. Average pricing of chromium products was also lower, mainly as a result of increased competition.

Higher energy costs adversely impacted operating profit by £6.2 million versus 2000 on a comparable basis, of which around £4.9 million was in the first half.

Early in 2001, headcount reduced by more than 10 per cent as a result of a business process re-engineering exercise at Corpus Christi,Texas. The one-off cost of £2.3 million was largely recouped over the balance of the year. At the year end the business employed 439 people, 18 per cent below the comparable figure two years ago.

Despite the headcount savings, underlying fixed costs increased year on year in excess of inflation, mainly as a result of unusually high maintenance expenditure, particularly in the second half of the year. Additional controls on maintenance expenditure are now in place.

A new gas cleaning system for the chromic oxide plant at Eaglescliffe, UK was commissioned in the first quarter of 2001 costing £2.6 million. This will further enhance environmental performance standards. Some production capacity of chromic oxide for use in metal alloys was unavailable during the period as a result of this project.

A project is under way to link the Corpus Christi manufacturing facility to a combined steam and electricity co-generation plant being constructed at an adjacent oil refinery. This will come on-stream in late summer 2002, reducing energy costs.

The ratio of trade working capital to sales at the end of 2001 was 14 per cent, unchanged from the end of 2000 on a similar level of inventories.

On 12 February 2002, the US Environmental Protection Agency (EPA) announced restrictions, from 2004, on the use of chromated copper arsenate (CCA) as a wood preservative in the US affecting CCA treated timber for consumer use. Elementis Chromium supplies chromic acid which is used in the manufacture of CCA and acts primarily as a binding agent.

In its statement, the EPA announced the transition from the use of CCA in a variety of consumer uses by 31 December 2003 in favour of alternative products. The statement confirmed that the transition affects virtually all residential uses of wood treated with CCA, including wood used in playstructures, decks, picnic tables, landscaping timbers, residential fencing, patios and walkways/
boardwalks. By January 2004, the EPA will not allow CCA products for any of these residential uses.

The statement goes on to state that, in the current year, the CCA manufacturers expect a decline in production of CCA products for affected residential uses up to 25 per cent. During 2003, the CCA manufacturers expect the transition away from CCA to continue and increase, with a decline in production of CCA products for affected residential uses up to 70 per cent.

Elementis understands that, following the CCA manufacturers’ request to amend the pesticide registrations, the EPA will publish a notice in the Federal Register and a 30 day period for public comment will follow.

As previously indicated, Elementis estimates that, as a result of the EPA’s decision, the global and US demand for chromium chemicals would reduce by around 5 and 30 per cent respectively. Elementis Chromium’s sales for industrial applications of CCA, such as utility poles, rail sleepers and marine pilings, are relatively strong and are not affected by the EPA ruling. Nevertheless, Elementis Chromium’s global sales of chromium chemicals could be adversely affected by around 15 per cent by 2004.

Elementis does not now expect its sales in 2002 to be materially affected by the EPA ruling.