Elementis Chromium is the world's largest producer of chromium chemicals.

£109.0 million Sales

£3.7 million Operating profit*

* before exceptionals
** before goodwill amortisation and exceptionals

Global demand for chromium chemicals in the first half of the year was flat compared to the average of 2001, but declined in the second half due to a severe down-turn in demand for gas turbine engines and steel mill refractories. Demand from the wood treatment sector held up as expected. Elementis maintained its market share, improving its position in higher return sectors. Competition was fierce, driving prices down almost 10 per cent, particularly in the second half of the year. Three competitors closed down their plants in 2002, in addition to the rationalisation of the Elementis Corpus Christi, Texas operation, reducing global production capacity by around 13 per cent.

Sales contracted by 14 per cent to £109.0 million, on 2 per cent lower dichromate equivalent tonnage. Lower chromium chemicals prices reduced sales by £12.6 million and the balance of the sales decline was due to currency movements and volume. The specially developed granular chromic acid product CA21 was recognised with the Queen's Award for Innovation in May, and continued to show strong growth in global markets.

Operating profit before exceptionals grew 42 per cent to £3.7 million due to strong cost reduction performance. Offsetting the negative impacts of pricing and volume, energy cost savings contributed £4.6 million, the Six Sigma efficiency programme £2.0 million and other operating efficiencies £3.5 million.

As previously stated, in February 2002 the EPA announced restrictions on the use of CCA as a wood preservative for consumer use in the US, to be effective by 2004. Elementis Chromium supplies chromic acid, which acts primarily as a binding agent, to producers of CCA. As expected, this announcement did not affect sales in 2002, and the EPA has not yet announced its final position.

In response to the market situation created by the EPA's actions, Elementis acquired the chromium chemicals business of OxyChem, the only other US producer, for £26.9 million cash and up to £3.8 million deferred consideration depending on future business performance. The transaction was completed on 6 December 2002. The manufacturing facility acquired at Castle Hayne, North Carolina, US is the world's second largest after Elementis Chromium's plant at Eaglescliffe, UK, and is a first class operation in every respect. As a result of the EPA's actions, Elementis Chromium estimates that global sales of the combined business could be adversely affected by around 13 per cent by 2004, compared to an estimated 15 per cent prior to the acquisition.

Rationalisation of the Elementis Chromium Corpus Christi, Texas, US site was undertaken shortly after completion of the transaction for a one-time restructuring charge of £5.1 million. The chromic acid plant was closed and the dichromate unit mothballed with the loss of around 60 jobs and an impairment charge of £35.4 million was recorded against the net book value of existing assets. Annualised operational savings are now expected to be at least £13.0 million, of which at least half is expected to be achieved in 2003. The transaction and integration of the business was completed with minimal disruption and has responded to the adverse effects of the EPA's announced restrictions on CCAs by creating a single low cost North American producer able to compete more effectively against low cost imports in North and South America.