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Among finance’s more cold-blooded inventions is the tontine: a 17th-century contract in which several people pool their money or assets, and everything goes to the last survivor. Occasionally it reappears in modern markets — financier Bill Ackman tried out a version a few years ago. Today, it could describe the strategy of UK chemical conglomerate Ineos.
The company led by Sir Jim Ratcliffe is in the early stages of its metaphorical tontine: chemicals is a crowded space. Since 2018, global capacity growth has consistently outpaced demand, and projections through 2030 suggest the industry is still not done building, according to commodity data provider ICIS. In high-cost Europe, average utilisation rates have fallen to 74 per cent, says industry body Cefic.
One response would be for everyone to retrench and wait for better days. That’s what Ratcliffe’s peers are doing. More than 5mn metric tonnes per year of European ethylene capacity, or a fifth of the region’s capacity, is expected to close, according to S&P Global. Out of 51 crackers in Europe, 16 are either for sale, closing or are idled since 2020, says ICIS.
Of course, a tontine player always has another temptation: to push their rivals down the stairs. In industrial terms, that means forging ahead in the hope of driving out weaker peers. This is risky because Ratcliffe’s companies are indebted. Ineos Group Holdings and Ineos Quattro are lossmaking and have more than €17bn in net debt. Their bonds are nosing into distressed territory.
Yet there are reasons his gamble might work. First, Ineos is a relatively low-cost producer. It has, for years, imported cheaper feedstock from the US into its European plants. Its new “Project One” cracker will also be significantly less energy intensive than older assets.
Second, Ineos — being one of the world’s largest chemical companies and the employer of 24,500 people — is good at throwing its weight around with governments. In December, the UK agreed to a £125mn loan guarantee-and-grant package for the Grangemouth complex in Scotland. The French government chipped in €300mn for its Lavéra plant. Such support is helpful to Ratcliffe in tough times.
Ratcliffe’s punt depends on his ability to convince his creditors to be patient, and trust that his strategy will work. His first debts are due at the Quattro unit in January 2027. Lenders may be willing to amend and extend: if Ineos’ strategy does pay off, and its ebitda returns to 2022 levels, leverage at its Ineos Group Holdings will halve from the current 8.9 times ebitda.
This is, without question, a leveraged bet. But that is consistent with the career of Ratcliffe, who built Ineos by taking a risk on unloved assets, backed by high-yield debt, and turning them around. His biggest wager yet is that Europe’s chemical industry is headed for a tontine, and that Ineos will be the last participant standing.