How Tata Chemicals Europe survived its energy costs doubling

The ex-ICI soda ash business faced a make-or-break hike in its costs.

by Adam Gale
Last Updated: 17 Sep 2018
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Down to business

It might surprise that anyone in the UK would continue to produce soda ash, a commodity used primarily in the manufacture of glass and detergents. Yet while every other plant in the UK has closed, Tata Chemicals Europe (TCE) still operates at Lostock, Cheshire - 144 years since production began in the area under the company's original incarnation Brunner Mond, later part of ICI.

While competitors in developing countries have notably lower production costs, TCE can win on reliable logistics, precisely because it has the only soda ash plant remaining in Britain. Indeed, foreign competition had nothing to do with the events that threatened the company in 2015.   

Turnover: £180.2m (2016-7)

Employees: ca400

Headquarters: Northwich, Cheshire

The seeds of the problem were planted a decade earlier. Soda ash manufacturing is highly energy intensive, requiring huge volumes of steam. Once, this had been provided by coal power stations at TCE’s two soda ash sites, Winnington and Lostock, but these had been replaced in the early 2000s with a gas fired CHP (combined heat and power) plant owned and operated by E.ON.

The 20-year supply agreement with E.ON stipulated that the formula used to calculate the price of steam would switch in 2015 to one based on the current price of gas, which had dramatically risen in the preceding decade. ‘We were faced with our energy costs doubling. It was about 50% of our cost base,’ explains Phil Davies, TCE’s general counsel and business services manager, who joined in 2011, five years after Indian conglomerate Tata bought the company.

‘We had to think of our plan B, years in advance. We realised that it wasn’t going to be achieved by playing around the edges. This needed to be something far more fundamental.’

By late 2012, MD Martin Ashcroft had put together a bold plan, one you’d be unlikely to find in many 21st century business books: to turn his company into a vertically integrated conglomerate.

Step one was to take ownership of the steam plant, in order to mitigate the coming energy cost explosion – and that required convincing E.ON. ‘They understood that 2015 was likely to be a relatively unsustainable situation for us, and therefore for them as well,’ says Davies. TCE agreed that it would take ownership of the plant in September 2013 and then outsource the operations and maintenance to E.ON. 

To make the new costs of steam production work, TCE built a £5.5m turbine in the CHP plant, to enable it to generate more electricity. By selling power to local industrial firms via ICI’s old private wire network, as well as participating in the lucrative Capacity Market by selling direct to the National Grid, TCE was able to offset the high gas prices that reflect in its cost of steam.

The Lostock plant.

The electricity generation business currently contributes over £8m in profit to the group. While it now seems like a win-win, this was no easy decision. The only way to generate more electricity at the CHP plant with the same gas input was to reduce the proportion of energy converted to steam, and the only way to do that was to close the larger and older of TCE’s soda ash plants, Winnington, with the loss of 220 jobs.

‘One of the things we learned was that whilst it was very hard emotionally for a lot of people, the fact that the energy situation was well explained meant that most understood it really wasn’t a choice. We also looked after our people, squeezing everything out the purse and trying to get as many as possible to take voluntary redundancies,’ says Davies.

With only one soda ash plant operating, at Lostock, TCE then set about diversifying by expanding their sodium bicarbonate business. A derivative of soda ash, bicarb is less exposed to the economic cycle and has a much broader range of applications, from neutralising acids in flue gases through to the production of animal feeds and bath bombs.

At the highest quality grades, it is also used in pharmaceuticals and haemodialysis. This places it under a stringent regime of UK and European regulations and quality audits, something Davies says gives TCE and its EU competitors a comparative advantage in global markets. ‘There is a "made in Britain" premium on this product. The number and depth of our quality accreditations add a cost to the business but they add a significant benefit as well. It’s allowed us to export to the Far East and South America, for example, at a profitable margin.’

Roughly 40% of the soda ash produced at Lostock now goes into TCE’s bicarb business, which operates at both Lostock and Winnington. Given that Winnington used to produce a substantial proportion of the company’s soda ash, it follows that TCE brings significantly less soda ash to market that it used to.

Winnington, ca 1900.

Davies says TCE allowed its soda ash market share to fall gradually, but was understandably determined not to leave its existing customers in the lurch. The solution was a ‘virtual factory’ – an import facility at Immingham near Hull, supplied by Tata’s chemical division in North America.

The virtual factory, the redundancies, the decommissioning of the Winnington plant, the new steam turbine – this clearly wasn’t a transformation done on the cheap. So how did TCE fund it all?

Davies explains that while the Tata mothership in Mumbai was ‘flexible’ with finance, this didn’t extend to direct funding. Half the cost of the new turbine was paid for by an Exceptional Regional Growth Fund grant that reflected its green credentials. The company also benetitted from its 2010 acquisition of British Salt, an early but very important iteration of its diversification strategy.

Despite legacy issues from its defined pensions scheme, Davies says TCE is now a ‘business on the up’, cutting approximately £1m a year from its cost base by streamlining old ICI processes and planning a number of major investment projects. Throughout, however, it will continue to produce soda ash in Cheshire, as it has done for nearly 150 years, because neither the bicarbonate business nor the energy business could exist without it.

Indeed, the fact that its supply is local insulates it to some degree from the possible disruption of Brexit, a subject on which Davies says the company remains neutral. ‘We are as ready and well positioned as anybody. We’re not sitting around scratching our heads. We’ll face whatever challenges come our way.’

Main image not of TCE plant. Credit: Pixabay/Pexels

Body images: TCE


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