A Case in Diamond Chemicals

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Diamond Chemicals PLC (A): The Merseyside Project
Late one afternoon in January 2001, Frank Greystock told Lucy Morris, “No one seems satisfied with the analysis so far, but the suggested changes could kill the project. If solid projects like this can’t swim past the corporate piranhas, the company will never modernize.” Morris was plant manager of Diamond Chemicals’ Merseyside Works in Liverpool, England. Her controller, Frank Greystock, was discussing a capital project that she wanted to propose to senior management. The project consisted of a £9 million expenditure to renovate and rationalize the polypropylene production line at the Merseyside Plant in order to make up for deferred maintenance and exploit opportunities to achieve increased production efficiency. Diamond Chemicals was under pressure from investors to improve its financial performance because of both the worldwide economic slowdown and the accumulation of the firm’s common shares by a well-known corporate raider, Sir David Benjamin. Earnings per share had fallen to £30 at the end of 2000 from around £60 at the end of 1999. Morris thus believed that the time was ripe to obtain funding from corporate headquarters for a modernization program for the Merseyside Works—at least she had believed so until Greystock presented her with several questions that had only recently surfaced. DIAMOND CHEMICALS AND POLYPROPYLENE Diamond Chemicals, a major competitor in the worldwide chemicals industry, was a leading producer of polypropylene, a polymer used in an extremely wide variety of products (ranging from medical products to packaging film, carpet fibers, and automobile components) and known for its strength and malleability. Polypropylene was essentially priced as a commodity. The production of polypropylene pellets at Merseyside began with propylene, a refined gas received in tank cars. Propylene was purchased from four refineries in England that produced it in the course of refining crude oil into gasoline. In the first stage of the production process, polymerization, the propylene gas was combined with a diluent (or solvent) in a large pressure vessel. In a catalytic reaction, polypropylene precipitated to the bottom of the tank and was then concentrated in a centrifuge. The second stage of the production process compounded the basic polypropylene with stabilizers, modifiers, fillers, and pigments to achieve the desired attributes for a particular customer. The finished plastic was extruded into pellets for shipment to the customer. The Merseyside production process was old, semicontinuous at best, and, therefore, higher in labor content than competitors’ newer plants. The Merseyside plant was constructed in 1967. Diamond Chemicals produced polypropylene at Merseyside and in Rotterdam, Holland. The two plants were of identical scale, age, and design. The managers of both plants reported to James Fawn, executive vice president and manager of the Intermediate Chemicals Group (ICG) of Diamond Chemicals. The company positioned itself as a supplier to customers in Europe and the Middle East. The strategic-analysis staff estimated that, in addition to numerous small producers, seven major competitors manufactured polypropylene in Diamond Chemicals’ market region. Their plants operated at various cost levels. Exhibit 1 presents a comparison of plant sizes and indexed costs.

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THE PROPOSED CAPITAL PROGRAM Morris had assumed responsibility for the Merseyside Works only 12 months previously, following a rapid rise from an entry position of shift engineer nine years before. When she assumed responsibility, she undertook a detailed review of the operations and discovered significant opportunities for improvement in polypropylene production. Some of these opportunities stemmed from the deferral of maintenance over the preceding five years. In an effort to enhance the operating results of the Works, the previous manager had limited capital expenditures to only the most...
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