Victoria Chemicals PLC (A):
The Merseyside Project
Capital Budgeting Case Analysis
Victoria Chemicals: Case Background
Victoria Chemicals was a major competitor in the chemical industry worldwide. The company was the leading producer of polypropylene, a polymer that is used in a variety of products including carpet fibers, packaging, and automobile parts. Polypropylene was essentially priced as a commodity.
In order to meet demand, Victoria Chemicals produced and manufactured polypropylene at two plants, the Merseyside Works plant in Liverpool, England, and the Rotterdam facility in Rotterdam, Holland. The plants were built in 1967 and are identical in scale and design. Additionally, managers of both plants reported to James Fawn, the executive vice president and manager of the Intermediate Chemicals Group (ICG).
The production of polypropylene pellets begins at Merseyside with propylene, a refined gas received in tank cars known as propylene. The production process consisted of two stages: In the first stage, the gas form of polypropylene was combined with a solvent in a pressurized vessel and then concentrated and collected in a centrifuge. Next, the polypropylene was mixed with stabilizers, modifiers, fillers, and pigments in order to create the final product, a plastic pellet, which is shipped to the customer. The company positioned itself as a supplier to customers in Europe and the Middle East.
In addition to small producers, seven major competitors manufactured polypropylene in Victoria Chemicals’ market region. Their plants operated at various cost levels. Primary competitors CBTG A.G. and Hosche A.G. were able to produce higher annual output at lower costs per ton. Table 1 on the following page presents a comparison of plant sizes and indexed costs.
Table 1: Comparison on the Seven...