Melamine Chemicals, Inc. Business Information, Profile, and History

Company Perspectives:

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History of Melamine Chemicals, Inc.

Melamine Chemicals, Inc. (MCI), is a wholly owned subsidiary of Borden Chemical, Inc., which has its corporate headquarters in Columbus, Ohio. Its ultimate parent is Borden, Inc. MCI's combined M-I and M-II plant, in Donaldsonville, Louisiana, is one of the world's major producers of melamine crystal and one of only two such plants in the Western Hemisphere. Its only U.S. competitor is DSM Melamine America, which has its plant in Fortier, Louisiana. Melamine is a specialized chemical crystal made from urea (ammonia and carbon dioxide) and is used in industrial and commercial products and applications. Four-fifths of it produced by MCI is used to make melamine-formaldehyde resins, which are widely used in adhesives, paper and other surface coatings and laminates, plastic moldings, and in foams and textiles. Worldwide, about 95 percent of all produced melamine is used in melamine-formaldehyde resins, but it is also used in fluorescent dyes and as a flame retardant in fabrics. Melamine's uses differ widely from one area of the world to another. In the United States, about three-fourths of it is used for surface coatings (37 percent), laminates (32 percent), and molding compounds (seven percent), whereas in Japan, for example, almost 60 percent is used in adhesives. Melamine, albeit invisibly, is present in almost all modern houses and garages--in, for example, kitchen counter surfaces, plastic tableware, laminated furniture, plywood sheathing, and automotive paint.

Beginnings and Growing Markets: 1968--88

MCI was incorporated in 1968, but it did not start producing melamine until 1971, when First Mississippi Corporation and Ashland, Inc. constructed MCI's first plant, the M-I, named after the process used to produce the chemical from urea. It was located on an eight-acre site near Donaldsonville, Louisiana, next to the Mississippi River, a site that MCI has continued to lease from Triad Nitrogen, Inc. since MCI first started operations. Triad, a wholly owned subsidiary of Mississippi Chemical Corp., also has been MCI's principal supplier of urea and ammonia, the necessary raw materials needed for making melamine crystals.

The largest investors in MCI were First Mississippi (reorganized as ChemFirst, Inc. in 1996) and Ashland, both of which owned 22.7 percent of MCI's outstanding common stock when the company was sold in 1997. These companies anticipated an increasing melamine market, both at home and abroad. New uses for the chemical as an additive in coatings, laminates, and adhesives were being found at a time when, in general, plastics and other synthetics were replacing more costly woods and metals in almost all phases of construction. Since there was only one competitor in North America, the investment seemed both prudent and prescient. Available supplies of natural construction materials were dwindling and spiraling upward in cost, creating an ever-increasing and irreversible need for synthetics. From the outset, an important part of MCI's mission was the development of both new and more efficient processes for making melamine and an applications technology to help spread melamine's industrial uses.

Through the 1970s and 1980s, MCI grew at a slow but steady rate. Melamine production worldwide reached a five percent per year average increase by 1986. By that time MCI was stable enough to cut some of its strings to its financial backers. In June 1987 it bought its M-I plant from First Mississippi and Ashland, but it continued to lease its 5,500 square feet of office space from Triad, which is still included in its plant-site lease. On its site, MCI owns and maintains a 17,600-square-foot warehouse and four silos, with a combined capability of storing 5.5 million pounds of melamine.

In the late 1980s MCI also built its second plant, based on the patented M-II technology invented by chief engineer Dave Best and former MCI president Roger Thomas. The new $20 million plant, adjacent to the old plant, utilizes a high-pressure high-temperature, noncatalytic process of converting urea into melamine crystals. Unlike the older plant, the M-II remains in constant operation, not requiring the mandatory shutdown for maintenance that takes M-I production off-line for up to three weeks each year. By the late 1990s the M-II plant was producing about 25 million pounds of melamine per year, slightly less than 25 percent of MCI total output.

The Lean Years and the Recovery: 1989--96

MCI faced a succession of "plague years" starting in 1989. Up until that time, the annual worldwide demand for melamine had been increasing at a fairly steady rate, but then a recession hit the economies of both Europe and the United States. MCI sales started into a tailspin, which, over a five-year period, amounted to about a $40 million drop and annual net losses. These peaked at $3.5 million in 1993, when market prices fell and fluctuated as low as $0.40 a pound, down from a high of $0.62 at the end of 1989.

Melamine had become a glut on the market, in part because of the economic doldrums, but also because cheaper imports were beginning to flood into the United States, forcing prices down. In 1993, 8.3 million pounds of melamine were imported. DSM Melamine America alone brought in 3.3 million pounds from its struggling Dutch parent company just to fill one specific order. The market was best in the Far East, a fact that finally prompted DSM to dismantle its 110-million-pound melamine plant at Geleen in The Netherlands and ship it to Indonesia, there to be reconstructed. It had been built at Geleen in 1992 and had only been in operation a few months when key markets in the former Soviet Union collapsed, forcing the plant to shut down. The relocating move cost DSM upwards of $115 million and kept the plant out of operation for two years.

By 1994 MCI and other melamine producers began benefitting from reversing market trends. By that year, although world production of melamine had reached almost 900 million pounds, 27 percent of which was produced in the United States, the global demand also reached its highest level in several years, suddenly revealing a shortage made worse by the fact that DSM's relocating plant was not yet on line. Economic recovery both in the United States and abroad played a major role in the market turnaround. Spurred by the upswing in new construction, demand for melamine resins sharply increased, and so did prices. In the beginning of 1994 melamine was selling at $0.43 per pound in the United States, but by July had risen to $0.48 per pound, a much more profitable figure for the nation's two melamine producers but still far short of the $0.60 per pound being paid in Europe. As a result, U.S.-produced melamine became very competitive worldwide, and its exports shot up to almost 50 percent.

The increasing demand led MCI to undertake some necessary changes. It overhauled both its M-I plant and M-I process, which first launched the company and still accounted for more than 75 percent of the 106 million pounds of melamine annually produced by MCI. It also instituted a preventative maintenance regimen that effectively reduced plant repair costs from $6.5 million to $3.9 million per annum.

In 1994, the year it which it received ISO 9002 certification, MCI enjoyed increased sales of almost 50 percent. At the time, it had a producing capacity of about 105 millions pounds per year. Its only U.S. competitor was American Melamine, which had a capacity of 140 million pounds. With the melamine market tightening sharply, MCI's projections for sales in 1995 were $46 million, increasing in 1996 to $57 million. Yet, despite the upsurge in the global demand for melamine, in 1996 MCI had to abort two projects and write off costs of about $1.9 million. One was a joint venture urea plant in Norway, with Norsk Hydro, which Norsk broke off when it reconsidered its priorities; the second was a joint construction venture of a melamine plant with Arcadian of Memphis, Tennessee. The plant was to have had an annual production capacity of 66 million pounds of melamine. The project was aborted, however, because MCI and Arcadian could not reach final agreement on the contract terms before Arcadian was sold to another corporation. At the time, MCI CEO and president, Fred Huber, expressed regret that the planned ventures failed to materialize but noted that MCI could turn the setback into an "opportunity to debottleneck and expand" MCI's two Donaldsonville plants.

Sale of Process Patents and Acquisition by Borden Chemical: 1997

In 1997 MCI took two very important steps. First, in February, it sold its patented high-pressure (M-II and M-IV) production technologies to DSM Melamine B.V., a business group of DSM Melamine, N.V., headquartered in The Netherlands. The companies then began a joint research and development program at MCI's Donaldsonville plant to test and improve the high-pressure M-II and M-IV technologies. Under the terms of the agreement, DSM got global rights to MCI's M-II and M-IV patents and related technologies, but MCI retained the right to use these technologies and to build two additional plants in the Western Hemisphere. DSM agreed to pay MCI $25 million, with payments completed in 2005, and also agreed to assist MCI in modifying its low-pressure M-I facility to implement process improvements developed by DSM. Second, after engaging Goldman, Sachs & Co. as financial advisors, MCI's directors sold the company. The sale was completed months after MCI rejected a buyout bid by Ashland, Inc. made on June 30. Ashland had made an offer to buy all shares of MCI that it did not already own, first at $12.50 per share and then later at $14.75 per share. In November, after a final rejection of Ashland's bid, MCI's board sold the company to Borden Chemical, Inc., a subsidiary of Borden, Inc. headquartered in Columbus, Ohio. Borden paid a far more lucrative $20.50 per share for the outstanding shares, with a total cost to Borden of about $112.8 million.

MCI's biggest jump in sales came in 1996, with an increase of about $10 million over the previous year. Still, the $55.62 million figure was less than the company's own projections made in 1994. In addition, the gross profits were only up about $1.35 million over profits in fiscal 1995. If from June 1994 to June 1995 MCI had charged out the red, by 1997 it was clear that although growth would continue it would probably do so at a more moderate rate. In that same year, as well, MCI had to reduce its production of melamine for almost two months while Triad overhauled its own plant equipment. The repairs cut back MCI's melamine output by seven million pounds, causing a substantial drop in the expected first-quarter earnings. Still, annual sales for 1997 were up about $3.3 million over the previous year, though profits increased by only $200,000.

Future Expansion and Promise

MCI's prospects look very good. The worldwide demand for melamine has now risen well above one billion pounds per year. Like most companies dependent on GDP-type growth, however, MCI relies on an expanding economy and corresponding growth of a variety of other enterprises. In fact, given its export potential, MCI's fate is tightly linked to both the U.S. and global economies. Of particular import for MCI are the fortunes of the building construction industry. When it does well, so does MCI. In general, if the U.S. economy continues growing, future demand for melamine also should increase. Projections are that the United States' needs should reach about 325 million pounds in the year 2000, up from 255 million pounds in 1995, for an average annual increase of about 4.5 percent.

That prospect encouraged MCI's parent company, Borden Chemical, to permit MCI to build the additional 66-million-pound-per-year melamine plant it had planned but had to abort in 1966, the year before it merged with Borden. It will be built on the original site near Memphis, Tennessee, and is scheduled to be completed in January 2001. In tandem with its Louisiana facility, the new plant will make MCI a close second to DSM as the world's largest producer of melamine. The plant will be located on land purchased from the Potash Corp. of Saskatchewan Inc. (PCS), a Canadian company that had previously acquired Arcadian, MCI's former partner in the aborted project. PCS produces urea in a nearby facility and will provide the MCI plant with its raw materials.

Analysis has suggested that the increased need for melamine is there, thanks in part to a growing use of it in industrial synthetics. Currently, MCI produces four size grades of melamine crystals: unground, ground, Superfine, and G. P. Crystal. Each is used for different applications, most of which incorporate the crystals in a melamine-formaldehyde amino resin. MCI's product is used primarily in laminates (e.g., on kitchen countertops), molding compounds (e.g., in plastic dinnerware), adhesives (e.g., in plywood veneers), coatings (e.g., on auto parts and panels), fire-retardant foam (e.g., in pillows), and concrete superplasticizers. Its use in laminates, principally tied to new home construction and renovation, should continue to expand as natural materials continue to grow scarcer and more expensive. For example, in furniture manufacturing, there will be an increasing use of pressed wood or particle board and laminates, even in high-quality furniture. In Europe, almost 90 percent of furniture uses laminates over particle board, a figure that may be reached in the United States in the early 21st century. Melamine's flame retardant applications also may gain wider use as fire codes become stricter and more rigorously enforced. If, for example, fire-retardant foams were required in home furniture, it would have a positive impact on the chemical's production. Only melamine's application in textiles and paper coatings is expected to decline, the result of health concerns over formaldehyde emissions. That should be offset both by its wider use in its existing applications and the discovery of new ones.

Principal Subsidiaries: Foreign Sales Corp. (U.S. Virgin Islands).