Johnson Matthey PLC (OTCPK:JMPLY) Analysts and Investors Day 2014 January 30, 2014 3:00 AM ET
Neil Carson - Chief Executive
Geoff Otterman - Division Director, Process Technologies
Iain Martin - Technology Director, Process Technologies
Henry Liu - Country Director, China
Don Roche - Director, Oil and Gas
Paul Walsh - Morgan Stanley
Thomas Gilbert - UBS
Martin Dunwoodie - Deutsche Bank
Simon Fickling - Exane BNP Paribas
Charles Pick - Numis Securities
Andrew Stott - Bank of America Merrill Lynch
Martin Evans - JP Morgan
Geoff Haire - HSBC
Rakesh Patel - Goldman Sachs
Peter Cartwright - Fiske
….with that I’ll hand over to Neil to start the [indiscernible]…
[indiscernible] And before we start on the business of the day, just to comment that I’m sure you have seen a couple of announcements this morning, the IMS which many of you avoid to get debated with Robert and the one about succession. So in case there was nobody, he was somebody in the room that didn’t know about the succession plans here. I’ve decided that the time is right now to stand down from Johnson Matthey. I’ll be standing down so on the 5th of June after the announcement of our full year results for this current year, and obviously delighted to also announce that Robert MacLeod will take over from me as my successor. I think that this job that I’ve had at Johnson Matthey it’s been a massive privilege to work as CEO of this company for the last 10 years and one of the duties that the role, maybe one of the difficult duties actually, is to then decide when it’s best to stand down and hand over to the successors and to work with the Board as a Chief Executive in order to make this move transition. So that’s where we’re at and I’m sure the company will go on and continue to thrive under Robert’s guidance.
So with that let’s get back to the business of the day. So, we have a full program here for you, and I’m going to leave Geoff who runs this division to run through it and introduce to you the presenters. But we also have in the room the full Process Technology management team. And they are there for you to seek out and coffee breaks and down the times and ask any questions you like about this business. You all know that starting in 2013; we started to reveal more of the metrics about this business. The reason was that we thought that you’d be interested because we also think that it’s an exciting and growing business. So you got up in this room our last management team of managers and they would all very much appreciate answering your questions, or debating the future of the particular part of PT as we go through.
So a foolish afternoon I am going to be blending into the background for the rest of the day and till the very end then I’m hoping that some of you will join us for some drinks and dinner around the corner. So with that, I will leave you and hand over to Geoff. Thank you very much. Geoff?
Okay. Well, thank you Neil. It’s good to hear that Neil says that you’re in for a foolish afternoon so I’m not sure which meaning of the word he meant with that. But yes it’s also good to talk about PT on a slow news day within Johnson Matthey so hopefully we can get you interested in PT, keep your interest even after you’ve had bit of lunch.
So anyway welcome to the Investor Day where we’re going to feature process technologies, quick introduction from me, Geoff Otterman. I’ve been with Johnson Matthey 24 plus years before that I’ve worked at KPMG for a bit. Time with Johnson Matthey is largely been in the finance area, and came up through the finance ranks, a lot of my experience was in the precious metals area as well. And I’ve been running the process technology division for about the last 2.5-3 years.
Quick run through the agenda today; So, I’ll talk about some of the opportunities we have, talk you about some of the broad markets that we’re in I’ll then pass it over to Iain Martin, who is my Technology Director, and he will talk about some of the technologies that we have across the division as well as focus on some of the opportunities we have in the chemicals market. I’ll then turn it over to Henry Liu, who is our China Country Manager. Henry also runs our substitute natural gas group. And Henry will talk to you a lot about that. Then wrapping up will be Don Roche who runs our oil and gas cluster of business, so Don is pretty new to Johnson Matthey and he’ll tell you about the opportunity there as well.
So that’s a team that will be speaking. I did want to quickly introduce the members of my team who are in the audience, so hopefully I don’t skip any. But in the chemicals area, Paul Armitage, Paul, you wouldn't mind standing; Antoine Bordet; Jane Butcher, Andy Hurst, Mohammed Khan, Graeme McGregor. Sorry, those three are in our oil and gas business, I should have mentioned that, sorry about that. And my divisional staff; I have Joe Stevenson, Business Development Director; Simon Slattery, my Finance Director; and Andrew Heavers who works with Joint Business Development. That’s the PT team. So I encourage you to engage with them on breaks or dinner just to fill in the blanks of the things that we’re, maybe not telling you. Anyway aims today, what are we looking to accomplish? Well really we think to make sure that you leave here with a lot fuller understanding of what this division does.
We’re proud that it’s being highlighted more and we’re excited to tell you about some of the opportunities that we have. So we will focus some time on the technology we have and how that technology and the know-how we have is a key differentiator for us in the markets. Finally, talk about some of the specific opportunities that we have for growth. So growth it will take us beyond kind of GDP, or standard growth. And looking at all of that we’re hoping that we can, or we’re targeting to achieve something like 10% top line growth over the next 6-7 years, so through the end of the decade.
Quick description of PT. So I know we’re focusing a little bit more on it, with those words just a quick talk about it. But again I encourage you to talk to others about it. So what do we do? Well, it says they’re into buy line, we really, we have technical strengths and know-how and we used to really help us develop flow sheets, to develop catalysts that are then deployed into the petrochemicals and oil markets. So it’s key to us, to work closely with plants.
Feedstock and capital costs are the most expensive parts of our customers’ plants and we work with them to ensure an efficient transformation of the feedstock to more a valuable end product. So catalyst [indiscernible] catalyst might be a fixed bed catalyst. And [indiscernible] of a fixed bed catalyst might be a couple of hundred kilos or might be up to several tons of material that would be loaded in a fixed bed. And those would be pellets, or might be a powder, or specialized shaped optimized reaction within the vessels.
The other type of catalyst we sell would be a powdered catalyst and then powdered catalyst can be dosed into a fluidized bed reactor, so it’s a completely different technology. So I’m pleased that we have both of those. The composition of the catalyst, it could be copper, might have zinc, might have some chrome, some nickel, might have some precious metals in it. So some Platinum, some palladium, maybe some ruthenium and might be built on a substrate like on a Zeolite or alumina or silica. So, pretty broad range of materials that we can deploy within our catalyst areas.
When we say process what we’re really talking about is an understanding of flow sheets and the licensing of the flow sheets. And key with those is really to make sure that we have a good interaction of our flow sheet expertise combined with what we do on the catalyst part of the business. So R&D is key there; the know-how we have with the people is quite integral to our product offering. So that’s a bit of PT and what we do. I’d like to get into how PT has really come about.
So a dozen years ago, the business that we had was probably a couple of million pounds worth of sales buried in a product line in another business or two. And Johnson Matthey decided that we wanted to become more of catalyst experts. We wanted to get more into this. So first thing we did was we bought ICI’s catalyst business from them. We did that in 2002. What did that bring to us? Well they had expertise in some specialized markets in which we did not participate. So Methanol, ammonia, some things in petrochemicals, and hydrogen, were the key markets in which they participated. And they also brought a whole new range of materials. So the base metals that I talked about earlier, the copper, the chrome, the nickel are really their bread and butter. The next business we purchased was the Davy process technology business that was in 2006. And the core of their expertise really is the process design. So it’s the flow sheet expertise, goes back to the interaction of the catalyst in a reactor with the technology. And we really liked that business because of the synergies that we had with the flow sheet design and the catalyst expertise that we bought with the ICI group.
In 2010, we bought what’s called the Intercat business. Intercat really was the first business that we bought that thrust us into the heart of refineries, in oil refineries. And why is it important. Why was it interesting to us? Their products, what other products they sell have links into environmental controls which fits well with us. And you also have products that help enable refineries to run more profitably, so we like both of those drivers. Last key acquisition in the portfolio was one we did about a year ago called Formox. And Formox has technology and catalyst to make formaldehyde. So again one of the reasons we like them is that they have a good combination of the flow sheet expertise that we like to have in the catalyst. And I know I have said that a number of times but that interaction within the technology is the real sweet spot for us and it’s a place where we can differentiate ourselves in the marketplace.
So, that’s kind of the four big building blocks of what’s happened over the last dozen years but had more ambition than that. So, we tried to build on some of the things that we brought over from the acquisitions. The things we like them, they are strong in their markets like the people that they had in there, so it gives us opportunity to differentiate. And each of those businesses we found were hungry for investment. So, just give you a feel for some of the things we have done since we acquired these businesses. I mentioned the people, yes; we are looking for hungry people who are keen to get out in the marketplace and learn about the markets, learn about the technology and help us deploy appropriate technology with customers.
Over that time we spent about GBP200 million on R&D, again a lot of it’s on flow sheet, lot of it’s on the catalyst. Capital spending, well, what we try to do is take a very long term view of our capital, so we invest so that when the business comes around we are ready to take advantage of it. And we spent about GBP300 million in CapEx over that period of time. So, that’s given us new plans, new capability and it’s gotten us out into different areas of the world. So, all in Johnson Matthey’s invested about a GBP1 billion into this division over the last dozen years. So, that’s kind of how we, that’s been evolution of PT.
So, what do we look like now? We have about 2300 employees in the division, about 10% of them work in the R&D area, about half the people who work for us are based in the U.K. which is the traditional hub for the ICI business we bought as well as the Davy business that came across, so permanent presence there. Over the last several years, divisions enjoyed about 15% top-line growth; it’s even 10% if you strip out the Intercat acquisition. Sales are spread really pretty nicely across the globe. We have four key regions where the sales are about 20%, 25% of our total division sales so that’s in China, Middle East and the rest of Asia as another region, Europe and then North America. So, we think a really good geographic split of the business. And you will see on the far right where we are splitting the business now in to oil and gas and the chemical sector and we will give you a bit more information on that.
If you look at us on the map, well, we are spread across the globe like you might expect for a company like ours, so technology centers, manufacturing plants and sales and service offices spread all over the place. If you look at this a year from now or so, you would also see that we have manufacturing plants in Shanghai and we are also building one in Brazil right now. So, those are two important growth areas for us. So, that’s kind of what we are, where we do, a little bit of where we do it. Next, I would like to talk about some of the strategy that we have and give a little color to this split of oil and gas and chemicals.
So, first-off top left there on the chemicals area, what are we really trying to do? Again its investment in the flow sheet understanding, it’s investments in catalysts and making sure that we understand what happens in customers plants, so that we can optimize the operation of their plants. In the oil and gas area, well, we have narrow positions there but we are really looking to take what we have and see what we can do with it. An example of that is with the Intercat acquisition. The Intercat acquisition brought two things into us, brought fluidized bed expertise and they brought zeolites expertise. And we are looking for ways so we can take those to and spread them out beyond just that one business. Also, where are some of the key for us are growing? Well we are going to invest internally and we also look to invest externally.
On the internal side, we are going to look to put big commitment in R&D, presently we spend about 30 million sterling a year on R&D, networks represents about 5% of our sales and we’ve looked for that ratio to continue into the future. Capital spending is going to be a key feature as we go forward over the next four to six years, depends on how things go, we’re looking to spend around £400 million mostly on new capacity in different parts of the world. Now that’s significant, I’m going to just put that in context a bit, it’s more than double our run rate for the last couple that last couple of years, so looking to step up on investments there. Return on invested capital while we’re presently at about 16%, within the division. Johnson Matthey group target is 20% and we believe we can get there over the next kind of five-seven years, so that’s still a target despite pretty significant investment.
Some of the external things we look at, well, we work with a number of external partners and why do we do that, well, the key reason for us to do it is it helps us to get technology taken up more quickly, so some of the key partners we work with are Dow, we work with BP, Air Products and Eastman are just an example of some of the companies that we work with, and again they really help us to get technology out in the market place more quickly. We’re also going to look to acquisitions as we go forward and we would look to essentially replicate what we’ve been able to do before, in terms of the quality companies that we buy in and we’d want to make sure that they have a good technology presence and things where we can continue to invest and have a unique position in the market place.
Start to talk about this split between chemicals and oil and gas, why do we do this. Well, we thought it made sense to break our businesses into the more market facing groups in which they face. So in the chemicals area there are three markets that are included in that and that’s Syngas, petrochemicals and then we’ve combined oleochems and biochemicals. That represents again 60% of our sales; the margins in these businesses taken as a whole are about 20%. And I’ll give people a minute to write that one down. Another point that I want to just note here is that you don’t see the Davy business as a separate carve out of this. And why is that? The reason is that the technology, the flow sheet expertise is a key feature in all three of the markets. So between the Davy Technology, we have the flow sheet expertise or the fore marks, so the acquisition we did there, it’s really spread among those three market facing groups. So we look at it as an integral part of our offering into the market place. On the oil and gas side, we’ve clustered things here for you into refineries, gas processing and diagnostic services, again that’s about 40% of the sales and you can see the split of those. So for most of the markets in which we participate we have a leadership position so kind of one, two in most of our chosen, pretty narrow, pretty narrow markets.
Next talk a little bit more about the chemicals area. Now this is a simplified flow sheet and it just highlights the areas in which Johnson Matthey participates, I’m not going to spend a lot of time, Iain Martin, technology guy, will spend a little bit more time and I’m sure he can spend time at the bar with you as well on it, but what this attempts do, is really segment what we do into the syngas, petrochems and oleo-bio areas. But what, the flow sheet then shows is that Johnson Matthey can take a diverse range of feedstock, so it’s oil, it can be bio-feed, it can be natural gas and then convert it to a number of building blocks, chemical intermediates that the end customer will then convert to products that they’d sell in the market place. So we’ll see this slide little later this afternoon.
So the flow sheet that I showed you is really a point of departure, just highlighting what we do today, so how do we grow beyond that, really. Well, we look for unique space in the market place where we think we can have an advantage, with the flow sheet design we have and maybe we can come up with a unique catalyst in the area.
Right, the goal is to find new space, an example of that, Iain Martin will talk about, it’s an area what oxoalcohols, big market which has been a big market for us specifically in China recently. We’ve modified our technology so that we can take what was essentially a waste product and we’ve been able to take that product and convert it to a more value-added product the customer. So it’s really just a just good example of how we’re stayed on top of what’s going on in the marketplace and we’re quick to respond and then redeploy different technology.
Again, what we do? In the right-hand block is really try to find that intersection of flow sheet expertise, catalyst expertise, build to know how of our people around that for something unique we can offer in the market. So little bit more, little bit a color on the Oil and Gas area, highlighting here that we four product areas in products to market. Refineries hydrogen, well, that itself explanatory, Don will talk a lot more about it. But it’s hydrogen that would be used in refineries for purification maybe of sulfur that can also used for cracking long-chain molecules in the more valued-added smaller ones.
The additives business touched on that a little bit that’s the [indiscernible] business these are catalysts that are dosed continuously into FCC units in refineries and they helped customers changed their product mix help with their profitability, but it also gives them tools to reduce their missions of socks and knocks. So gas purification important for us as we have products to remove sulfur, mercury, so it does polishing of those for gas coming out of the ground before it goes into pipelines and continue with other usages for us as well.
And diagnostic services, well, this is part of our prime offering within our Tracerco business where we’re offering inspection, diagnostic services from exploration all the way through to up to wellhead and then what’s going on within pipelines or within reactors. So what about the markets, if you look at this from a demand perspective? Well, in the chemicals, oil and gas area you look at the end products yes and you can see demand rising over the next several years 1% to 3%, within those 1% to 3% there are some markets in there that are little more interesting.
Methanol should show some better growth. SNG which Henry will talk about so it’s substitute natural gas should be more interesting. Looking on the Oil side, I’ve already talked about hydrogen and about additives a bit. So in the end even in the markets where there is not going to be significant growth, some of the key drivers in the marketplace like demand for cleaner fuels environmental pressures, profitability pressure in business a lot of those issues the business might have can have flow sheet for catalytic solutions associated with them. So market drivers really feel like there in our favor right now.
We’ve been too one of these before. And you probably would have seen us or picked up something from Johnson Matthey, so we think it’s a good graphic for us to use. So this is for all at Johnson Matthey. And we’ve highlighted here the ones that we think have the best opportunities for PT. So just a couple of things about them for some market demands imperative for process changes and regulatory compliance issues again all those things are built in here. And these changes that are going on in the marketplace, we do see is giving us good opportunities for long-term growth.
Next, I would like to talk about some of the bigger opportunities we have. So the things I’ve talked to you about already some of the standard growth in the markets that we would see, over the next we would see that giving us top line growth of something like another 200 million. So take us from somewhere just South 600 million this year to 800 million. So again just on the normal kind of growth. But we see four big opportunities that can give us kind of that step out opportunity and again these are things that are going on in the marketplace now. So we’re pretty confident that a lot of what we’re talking about is going to happen because we’ve pretty good visibility in the marketplace.
So four areas I want to talk about is shale gas in the U.S. I already have some questions at lunch over that, so try not to give the answer away. Total demand for fuels such increased transportation fuels and some of the drivers around making those. Next is coal to chemical and this a China phenomenon that we’ll talk about. And finally we’ll talk about the increasing pressure for companies to run their existing assets harder, and then to monitor what’s going on inside them.
If I can, like to first talk about Shale gas. So, all heard of it. It’s come down the last several years. To us, what does it really mean? Well, to us it really means it’s the opportunity for the petrochemicals industry in the U.S. to develop because availability of cheap feedstock. So, you can read the market studies as across one recently that petrochemicals market will be investments of $70 billion to $100 billion over the next 15-20 years. So, that's the part of Shale gas, it’s interesting to us, it’s the development of the petrochemicals industry.
And we see changes happening already. We see dormant methanol plants being moved from South America up to the Gulf Coast. We see companies who are interest in building new methanol plants. So we’ve talked to a number of them. And we see companies interested in building new ammonia plants in the U.S. So, those are things that we haven’t seen there in quite a long time. So, on ammonia, on that extra growth that we see in ammonia and methanol, we think we can benefit from.
But one of the big opportunities that we do see is in gas to liquids. And gas-to-liquids have been around for a while. Johnson Matthey has been working on it well for quite a while as well. So, sorry I missed that, sorry about that. We’ve been working on for quite a long time as well. And right now the economics are really compelling. You can take a cheap natural gas feedstock and convert it to a higher value dieseline product. So that’s essentially the business model, and it’s a differential in prices the feedstock versus the output that can make the economics work.
We have discussions with companies now. The economic seem to work. And we’re working with -- the work that we do with companies is we’re really trying to make sure that they understand the issues of running plants and hoping we can get them to de-risk their investments by dealing with the company like ours.
So the opportunity for us is both we would expect to get licensing revenue on flow-sheet design. But the big win longer term for us is when we start selling catalyst, so if we get a number of these plants going and we -- as licensing we get the catalyst when we get refill business that’s the part where we think that can add another something like 75 million to our top line by the end of the decade. And again, it’s engineering, process revenues for the next several years and then the catalyst revenue would take off.
But it does rely on several companies making big investments. These plants can be $1 billion, $2 billion, $3 billion plants that they’d be looking to put in. But as companies who ready to make the investments if we can help them we’ll be ready to both work with them on the flow sheet and build the plants to make their catalyst.
Next, just talk about transportation fuels. I’ve talked about a lot of the drivers already for improved emission standards, for feedstock that has more sulfur in it, longer chain molecules, all those things really play well into products that we sell both the additives, the hydrogen business as well as some of the tools, some of the products that we sell for exploration, so again good business for us. We see this giving us opportunity for additional £50 million on the top line.
Next, coal-based, coal to chemicals; China phenomenon this is where China is trying to monetize its coal reserves, reduce its dependency on imports for natural gas, cleaner air in place like Beijing and Shanghai, if you’ve been there. And this is something that’s already happening. So, there is already coal being gas fighting converted to methanol, or then taken downstream and convert it to olefins for plastics.
And the big win for Johnson Matthey is if we take a gasified coal, in coal regions in China, and then we can convert that to a SNG, so Substitute Natural Gas. And we have flow-sheet expertise that we can license to them and we have catalyst to go to sell to enable that. So this is happening now. So there is already a plant that’s running now. We’ve already licensed and are building -- customers are building more of these plants and we see this continuing to grow for the next several years.
So, by the end of the decade, with licenses, with catalyst sales of new plants and with refill, which is key to our business, we see this adding GBP 100 million to the top line, and Henry Liu will talk a little bit more about this.
And finally, we’ve titled this asset performance and integrity. And this is really us looking at customers’ existing assets and how can we help them make them either more profitable in which case we can sell them, where we call it revamps, we might sell them a different - they might have a different reactor. They might want to make a different end product. They might have utilities cost issues. So we will work to go on improving the efficiency or the output of their existing plants.
The other part we talked about is inspection of existing assets. And if you look here we have this banana covered tools which I’m not allowed to say, either of those words, but we have this new inspection device. It’s come from our Tracerco business to inspect subsea piping, so it’s pretty exciting new invention that our businesses has come up and we see it having really good growth prospects over the next couple of years.
So if you take all those things are inconsideration, the top line growth there, if you add that up, that comes to about £280 million. And that assumes that we keep our existing market shares in those areas. So it’s not the total market. So it’s what we think we can get. Instead of the 280 what we have done is we’ve penciled in 200 million of top line growth for our businesses.
So that’s what enables us to get from 600 to 800 on the more ordinary growth and then you tag on these four and that takes us up to a billion in revenue by the end of the decade.
Next couple of slides; just wanted to talk through, why do customers come to us? Why do they want to build a new plant with us? Why do they buy catalyst from us, and a first charge and even refill? And then finally what do we do to make sure that we keep business even in emerging markets, which is a different, which is a new challenge to us.
Why do they license technology from us for a new plant? I think the biggest thing is if they do that, they are going to have the confidence that the plant is going to work and that the economics of it are going to either meet or exceed their expectations. These are very expensive plants, hundreds of millions to maybe a couple of billion dollars. So what they pay us gives them that confidence that the plant is going to work. So it helps them de-risk their investment.
So what about after the plant is running? So they get our technology in it, they get our catalyst; end of life for a catalyst charge might be 2 to 4 years away. Why do they buy from us again? Now lot of the plant operators, if their plant is working, they really loathe to change. You will see, Iain is going to run through an example little bit later that shows how the catalyst cost to a business is very small relative to the feedstock and the utilities costs that go in it. They have something that works, that plays well in our hands and that’s important for a business.
About 70% of the business that we have is resale business. So it’s a key part of us, key part of what we do. So we can sit around, doesn’t mean we can be relaxed about our product development, the imperative for us is to have the intimate relationship with the customers and know what’s going on with them, to understand what’s going on in their plant, what new products they might want, or they might want the catalyst tweaked? So that’s how we maintain a high share of our business, as by engaging with our customers on a regular basis.
So what about in emerging markets? What challenges do we find there? In emerging markets, we see it is certainly on the first fill. If the customer is building a new plant, they are building a methanol plant for example, in China, and they are taking Johnson Matthey’s catalyst. We really see the same economic drivers in China as we would, as we are accustomed to seeing in Western world. They look for the same return on investment metrics that we look at, same safety standards that we would make sure, within the same operability standards.
So fundamentally, we don’t see that market is significantly different. However, we do have to make sure we are on the ball, is on the replacement business. Again that scenario where we have to make sure that we are working closely with them; that we understand how important the cost is to the catalyst. If a customer for example has interrupted feedstock, how does that play into the economics of the plant and then the design of the catalyst? So we are trying to fend that off. One of the ways we fend that off is we’re going to be building a new catalyst plant in China. So that will take away any cost issue, and always looking to see how we can simplify processes and make our catalyst more cheaply.
So, some of the takeaways here, as I wrap up here, so we are strong in the markets in which we participate, so try to be one, two in the market is how we define them. And how do we do that? Well, by ensuring that the products would do so or the leading technology and it requires us to put in a lot of R&D, a lot of technical service, so there is a lot of technology and a lot of know-how that goes around that. On the market side, well, seems that a number of things are coming together now that should play well for us in the long-term, talking about some of the environmental pressures, pressure on refineries to run more profitably, so changes in feedstock. All those things play really well into our space.
Margins, well presently 20% in chemicals kind of mid-teens in the oil and gas area and we would expect those to continue. We will certainly strive to increase but we would expect that to continue over the next several years. Finally on the growth, well, we think it’s possible for us to get double-digit growth over the next 10 years and give you bit of a profile of how we think we could get that. We think about some of the markets we are in; if we look for example methanol, we’d see good growth prospects there, so pretty steady growth from now through the end of the decade. That said it could be kind of lumpy at times, so you might get new plants coming on or you might get a couple of bigger plants that need refill, so could be some ups and downs but the long term trend is up.
In substitute natural gas, selling some licenses now. We sell some catalysts now. We see that really stepping up over the next two to three years. And then we have in our model so that will level out near the end of the decade. And we are saying that because we don’t know how long this colder (Ph) chemicals push within China will last. So in our models we have assumed that that will kind of level off near the end of decade. Gas and liquids I talked a bit about that, some licensing over the next several years. But the big win for us is if we can sell catalyst, so we have multiple sales and we can sell catalysts and the significant revenue near the end of the decade.
Now we could see that more as steady growth. We don’t see any risk, big step changes in what we are doing now. So, I think that’s it for me. So, good growth overall, try to tying the technology and catalysts where we can and we are trying to get ready for when the markets do develop. So, that’s it, happy to take questions now and I guess logistically if you have a question wait for one of ladies to bring a microphone to you, if you could introduce yourself, company you work for and is that it, anything else? No, that’s it. Okay, one down here.
Paul Walsh - Morgan Stanley
Thank you very much. It’s Paul Walsh from Morgan Stanley. Just two questions from my side please. The first is to what extent delays in the ramp up of new North American ethylene capacity have been taken into consideration. I know there are the stated timelines but my understanding is much of that might will be delayed, the same thing with if you calls chemicals in China, we keep hearing from industrial gas companies that that’s something that’s been pushed out a little bit, just your thoughts on that? And my second question on the numbers, you have given aspirations for double-digit top-line growth and a returns target in line with the group which on my maths is suggesting you are going to get margins up to sort of low 20s really from where we sit today and EBIT absolute, could almost double in the next four or five years. I just wondered if that’s kind of right in terms of what you are thinking because that’s what you back out from the comments around returns and growth? Thank you
I would say four or five years is probably a bit optimistic for when we would look for EBIT to double but certainly the end of the decade that’s, would be target areas. Couple of other things, ethylene, we don’t have a position in ethylene really we don’t have, it’s not a catalytic, I don’t think it’s catalytic process. We don’t have any flow sheet or catalytic, so we don’t have anything in there. So that’s, so projects being canceled, don’t really matter to us in this space. Colder chemicals, well yeah, we have seen a slowdown and the early indicator for us is number of new licenses that we sell. So, that’s definitely, we have seen it slowdown in 2013. We are still seeing a lot of activity in the marketplace, lot of projects approved and they just have to go forward. So, we are still bullish it will happen, might be a little later than we might have hoped but we still see the market developing.
And the numbers, I kind of the view I gave and Henry will talk about is really taking that slowdown this past year into consideration.
Thomas Gilbert - UBS
Thank you, very much, Thomas Gilbert at UBS, lot more basic question. Can you talk a bit about the stickiness of the revenue in this business in terms of, when you win a project do you have the revenue for the physical life of the plant or is this more a customer relationship, when the business with Shell does that mean you can roll that out of all their platforms, is it plant by plant, and also what happens when the ownership of an asset changes, what does that mean to you, so just couple of general comments.
Well we like it to be sticky, I mean it’s a, what we do see is that as Angus said 70% of our business is refill business, so it’s repeat business that we would have with the customer. How sticky is it, we have, for example we have methanol customers that once a technology is used in one of the plants they’ll look at to roll it out into different plans, so that can happen. I don’t, we don’t see a lot of other as -- I don’t see we see a lot of other examples where someone would have one plant, they do it here and then they roll it out to others, I’m trying to think of this, I think we see that maybe is some of the refineries business and but, that rolling out to different plants, I don’t think, that doesn’t happen but we do work awfully hard to make sure that once we get in that we understand what’s going on with the customer and that we can be in the pole position for repeat business. I’m not sure. The question and the answer is probably going to differ for some of the different technologies that we have so some of the other guys might be able to shed some light on it later.
Martin Dunwoodie - Deutsche Bank
Thanks, Martin Dunwoodie of Deutsche Bank. Apologies, this is another fairly basic question I think, if you’re selling a license to a plant well operated how much does that guarantee you’re selling the catalyst as well or do see other people have the opportunity to sell the catalyst and then secondly, again probably very ignorant but other gaps in technology that you have and it’s a vision that you want to fill.
Okay, on the, if we license technology, technically we would sell the catalyst and we do have a good track record. Some of the technology that we sell, we might put in a non-Johnson Matthey catalyst but part of what the service that the Davy group gives is, it does a lot of robust testing of the catalyst, so it’s adding value to the customer, so again whether it’s a Davy licensed product or flow sheet play very high success in the repeat business. So certainly in the short term but long term for these plants could be about 20-30 years might be a lifetime of plant, again that’s an area where we have to maintain the good relationship and make sure that we’re fending off any competition, because after the, part of taking on, part of what happens when we license something, is we’re guaranteeing the plant operation and it has to have the catalyst that we recommend. So customers will know that if they don’t or if they use someone else’s catalysts that they’re potentially changing the operation of the plant. Gaps that we’re looking to fill, oh.
I’m guessing you don’t want to answer that.
Well, what I would say, I guess I’d go back to some of the things, just about acquisitions, we’re eager to get into adjacent technology areas, and we’ll look for those, we’ll try to invent them, we’ll look for, and one of the things we’ve done in the past is we’ll approach a company and look at it technology that maybe it hasn’t invested in in a while, maybe we’ll try to bring that in and refresh it, that’s been a successful business model for us, we might look to acquire a company, I mean if part of the fore marks business model, is technology, so that was a really good acquisition for us, so that would have been a, that was a gap because it got us into fluidized bed technology, got us downstream from ethanol, that also was our first oxidation catalyst so it’s a different class of catalyst so it is good for us.
Justin [indiscernible], Globe Investors, I have two questions, the first one is are you conducting any research on processes that consume CO2 other than the existing established urea process and the second question is, what is your working assumption regarding competing technologies because the chemical conversion is under a whole a lot of development work on the basis of enzymes algae, which cellulosic based chemistry and take for example Butanediol where you sell licenses and we get to see four platform chemicals out of which how do think will those new technologies impact your business?
I know, I think that questions probably best answered by my Technology Director, we’ll throw him under the bus a bit here. Yes, I’ll tell why, can we hold that and we’ll cover it when he gets up. I guess, well, three presenters going through Chemicals China and Oil and Gas, so detail things may push later.
Simon Fickling - Exane BNP Paribas
I’m Simon Fickling of Exane BNP Paribas. On the Davy business firstly just on housekeeping really, will that not report be reported separately going forward? Is that now fully integrated for reporting purposes in the correct?
I would not be -- we do not plan to split it out anymore.
Simon Fickling - Exane BNP Paribas
Okay, sure. And secondly on the Davy business, can you give us a bit more color on the shape of how revenue comes in also contracts are awarded because now there’s been four since January? And you’ve said that comes in quite lumpily but how that translates into revenues? Thanks.
I kept my Chief Accountant to go through that explanation as its fund gymnastics when we’re going through but essentially the business will recognize, gets revenue from a couple of sources. The license income that it gets will be phased over the project time period. So from the time we signed something and it could be 2-3 years you know that period of time when we’d amortize that revenue into the P&L.
The other source of revenue that they get is for engineering services, so to take the customers’ requirements translate that in to a basic engineering package, so we’ll do engineering work on that and we’ll get a margin on that and we’ll get revenue on that as it occurs. So, I’m not sure it’s a kind of percentage or completion on the license part and then there’d be as we go on the engineering, and if we saw catalyst as well, we’ll get the margin on that when catalyst has to be delivered.
Simon Fickling - Exane BNP Paribas
Okay, great. And one I did have as well on Davy and/or anything your competition and the direct competition in the catalyst side they don’t have this flow sheet type of business, could you talk about your competition in that area? And perhaps, a comment on why if it is so beneficial to the catalyst business synergies that are operating there. Why perhaps your [indiscernible] in chemical catalysts haven’t sort made the acquisition that you made in few years ago into the flow sheet licensing business?
Yes, we do have competition it’s very similar to ours good example of that is Haldor Topsoe, a Danish company that’s a competitor of Johnson Matthey in a number of areas and they do bring that flow sheet design expertise in the catalyst manufacturing to the party. There is another company we deal with that technology company kind of commercial partnership with catalyst company so they’ll try to put something together but it’s not a joint ownership position to more commercial agreement. So we do see that level competition in the marketplace.
Andrew Stott - Bank of America Merrill Lynch
Okay, thanks. I’m Andrew Stott from Bank of America Merrill Lynch. Just coming back to 10% target over your target, the building books flat as I understood are underlined growth from refill of 5% to 6% looking at slide 19? The next leg up is CapEx related I guess, is there anything else in that equation are you banking market share gain or acquisitions within that target?
No, our key assumption is that we maintain market shares. No big gains. No big losses. Bit ups and downs and no acquisitions in there.
Andrew Stott - Bank of America Merrill Lynch
You’ve talked about a fact the refill is important 70% of sales, I think you’ve mentioned that the refill rights is between 2 and 4 years, I wondered if you could just sort of just expand on that? Is there a significant difference across [indiscernible] and SNG catalyst by type in terms of refill timing? And in terms of the outlook for reloads looking forward are there any particular as we’d see an acceleration of that activity in the next year or two? And then secondly you talked about the fact that some of the catalyst are base metal in fact majority but some precious metals. To what extent is there any advantage in the fact that you offer a close look recycling service to customers in relation to the base metal chemistry?
On the refill business, I think in our biggest catalyst consumption customers the life would be four years, five even, three to four, so around that number. And we’d see that in methanol catalyst, we’d see that in ammonia, we’d see some of it in hydrogen and we’d see the same in SNG and I don’t think there is significant difference in them a lot of times it will be time to when customers have to do their turnarounds when they’ve to do big maintenance on their unit. So that’s why the timing happens that way some times.
Anything accelerated on that -- sorry, can you -- accelerated growth
Andrew Stott - Bank of America Merrill Lynch
In the next two years, where will the reload activity be particularly from this do you think although in reload categories where that will show through most?
There is not going to be any reload activity on the substitute natural gas as we’re just now selling our first bill so refill is going to be 2016-17, that type area. So all the refill business is going to be hydrogen, some of the things we sell in the petrochemicals and hydrogenation catalyst we sell in petrochemicals, and methanol ammonia, so and I guess that on formaldehyde shorter than that it’s going to one year -- it's kind of a one year turnaround, one year catalyst life on that.
Okay. And finally base metal catalyst versus PGMs. We don’t do any reclamation on base metal I mean we’ll -- we can provide some services with customers and we can direct their materials to some of the refiners, base metal refiners or re-claimers that we partner with. So, that’s just part of the service we have. But at Johnson Matthey, we don’t have any real economic advantage, if you will. So there is really no JM close loop on that.
Charles Pick - Numis Securities
Thanks. Charles Pick, Numis. Just on the slide 14, where you showed the investment the growth the 5% of sales spent on R&D and the two times depreciation the CapEx spend. Do you think your rivals are matching that and is there any essence that the interest rate is becoming more capital intensive at the time?
We see I mean we do see our rivals spending on CapEx. We see them acquiring other smaller catalyst companies. I would -- I haven’t heard is aggressive plans and this is for the broad range of things that we’re looking at. Remember, a big part of that CapEx spend would be in the gas to liquids area, so that the called a quarter of that spending. So, that would only happen if we sell that business and we’re not going to build the plans opportunistically. So, Andrew can do that, Andrew have [indiscernible].
Charles Pick - Numis Securities
And just one if are there any domestic Chinese competitors at all in this area?
Charles Pick - Numis Securities
Why do you never about them?
Well, within the Chinese market we haven’t seen them all that much although they’re starting to develop new technology and we see small companies -- if you look at a company like Sinopec I mean they’re huge company and they’re selling catalyst within country and they’re also starting to exporting to other, to the rest of the world. There’ll be some business that we won’t get because Sinopec will get it. So -- but there are other lower -- absolutely lower cost competitors that we see in China. And we’re counting on the companies that we seek or the ones that have kind of the same economic, safety drivers in their plants as we’d see the rest of the world. But there’ll definitely be -- we definitely see smaller kind of methanol plants popping up across China and those are ones that are not really in our market space. Just one down here.
Charles Pick - Numis Securities
Do you have any companies that effectively copy your product such that you have to try for legal enforcement of your IPs, particularly in China or is it the case that there is enough differences in the product itself and/or it’s just not enforceable and so you just have to basically count on customers choosing you because of the product itself and have IP enforcement be an issue?
To answer I think I’ll best answer that. We have had some instances where we have seen companies copy our technology and do, we can’t do enforce it. On a catalyst side I don’t think we see it as much. I don’t think we’ve, seen on the catalyst side. I mean part of the business model that we tried to employ is a continuous improvement of our catalyst. So we’re giving customers an advantage over the previous generation of catalyst we sold to them. So as long as we can differentiate that way, we are really trying to stay ahead of things like that. So we’ll see some, but it hasn’t been a huge issue to us yet.
A couple more and then we will take a break, and just for the housekeeping. We will have a Q&A session at the end to mop up anything if you haven’t been able to ask us.
Martin Evans - JP Morgan
Martin Evans, JP Morgan. Just on the China appetite for coal, again I mean at the moment there seems to be a bad press surrounding coal fired power stations in some in there push to reduce that dependency. Do you think whilst chemicals production is being encouraged, do you think there is a sort of risk the Chinese government turns its attention to chemicals from a pollution angle, and the emphasis sort of is reduced.
We know that, so Henry is actually going to address some of the things. But what we see still in China, these projects are being approved. So it’s a key part of the five-year plan that’s been put out. So projects are being approved. I guess the things you’ve raised are why we stopping bullish towards -- kind of towards the end of the decade because it feels like there’s a lot of momentum behind it and projects are being approved, plants are working and it’s going to happen for a while. So Henry might want to comment on that during his presentation. That’s one of the part he will talk about a bit.
I think there is one, just this be the last one, and then we’ll break.
Martin Evans - JP Morgan
When a customer announces, they want to build a plant, let’s say in three or four years’ time starting up. Obviously, you have enough time for your own CapEx, because your own production probably is smaller. But is there any time constraint in terms of meeting the timeline for a customer and that you -- do you miss on, I don’t know if there is a something like an R&D overrun or something where you just can’t yet -- has a plant ever not started up of a customer, because you were at the bottleneck?
Because we couldn’t supply catalyst? Is that?
Martin Evans - JP Morgan
Okay, and your technology wasn’t ready because, in other words, how [indiscernible] is the chemistry?
Company wouldn’t progress without having the idea have well-defined technology and the flow sheet design. So that part wouldn’t happen. I guess what could happen is catalysts wouldn’t be ready by then. That’s not happened, certainly not in my time. Here I would try think any examples that could be kind of a cardinal sin for that to happen. I think we’d probably rather no quote on something if there is a risk that we can deliver the catalyst, and they stuck in this prescribed startup time.
Thanks for your attention on the post lunch shift. So we have a 20 minute break here. So go out and get some coffee. Sally says we are going to start promptly at 3:30. So thanks for your attention
Okay everybody ready to restart. Good afternoon ladies and gentlemen. My name is Iain Martin. I am the Technology Director for Process Technologies division. I am chemical engineer. I started 28 years ago in the Davy business, and I joined JM through the acquisition of Davy in 2006. So my background I’ve designed chemical plants I’ve commissioned I’ve work to broader commissioning plants at a spell negotiating contracts in China and the Middle East. And then four years ago I switched into technology management initially within Davy and then a year ago I was invited to move up to the divisional role when this role was created.
I guess my background from Davy I can give a bit of a flavor for what it’s like to be bought by Johnson Matthey I taste it’s been it was a very positive experience I think [indiscernible]. They’ve been a very encouraging parent and the business is at least doubled in size since 2006. So it’s not an unpleasant place to be.
I am going to give some background on what we do, frankly, on the technology side. And then comes to the -- of the kind of some of the more significant markets on the chemical area that impact upon our revenues. Henry Liu will then cover our activities in China and more specifically SNG, synthetic natural gas, which is strongly focused on to China.
I’ve prepared to pick up three questions from the earlier session I’ll try and take them off as we go through, but forgive me if I don’t make it to the end.
Johnson Matthey is fundamentally, it’s a technical organization and technology differentiation is a key factor in our approach. Around 10% of our staff are in R&D, the number is around 230, work in R&D inside the business. We also access a proportion of the essential, Johnson Matthey R&D down at Sonning [ph] that you may have heard of before. We expect to spent 5% of sales revenue on R&D and broadly grow that in line with the business. So you’ve seen the growth expectations, so that means we need to be growing R&D quite significantly as well. And we are looking to invest in facilities to enable to keep pace with the growth.
Most of our R&D at the moment in the north-east of England where we -- which should I call it as a core capability area. But we are looking to grow forward in America. We have a facility in Savannah, and Asia which we view as key growth areas for the business. We are a catalyst company but integrating more process technology around the catalyst, provides greater opportunity to develop into new markets, and provide greater resilience to the competitive threat.
We aim to be pretty effective on our R&D and I will go into more detail about what that looks like in another wall. But we do pay very close attention to the economics of the final projects that we would look for wherein we really try to back those where we see this potential significant revenue to return the costs related to the R&D program. We are asked a question around CO2, actually the picture in the left, bizarrely; is around a piece of technology, that to share the application while we’re looking for the low CO2 flow sheets.
It’s from QG Chemicals in Australia. It’s a gas heated reformer, and it’s one of the technology we have in Zinc gas area. We’re been mentioning Zinc gas quite a lot, just all it means is it’s a mixture of hydrogen and CO, cartoon monoxide. That’s all we mean by that. Johnson Matthey has only the widest range of technical option in the Zinc gas generation area. And this is probably the most advanced piece of kit, that commercially operating today; particularly good where low carbon is important, for example associated with Californian Low Carbon Fuel Mandate.
Some of you might well have seen the JM competency cores before, kind of they reflect the areas that Johnson Matthey believes we have capabilities in, and PT uses all of these. From the right inside, the chemistry skills, they’re from the left, more manufacturing related skills, and in the middle of the licensing. I’ll give you more background on all of these shortly. We have been doing this rather long time, been licensing in China since mid 70’s. So we have decades of experience in all of these areas.
And that combination of skills is quite rare. Particularly amongst organizations that are independent of chemical majors. Several of our customers find that it’s not having the potential to compete directly in their markets, it’s attractive. Again the second question came up was about the rareness actually, makes it one of the reason why some of the other catalyst company’s can’t do this easily. There is not much capability just how that that’s going to acquire.
So let’s now discuss first of those elements; the ability to develop new catalyst. It’s not that straightforward or friendly enough. First of all you have the chemistry knowledge. We have a huge amount of experience around understanding the chemistry particularly associated with this because it tells us mostly on the chemistry. It is actually a pairing on the surface of the catalyst. But our chemist also needs to understand how did the application -- how the catalyst will be used. What’s important to the end-user customer?
Let’s say, is it the feedstock efficiency gain, is there a way to reduce capital cost, product quality improvement? So he needs to understand the final application. Also needs to understand how you make catalysts and a welcome fit both in our manufacturing processes. But actually what is economic in manufacturing. The final element is catalyst testing. It is actually relatively easy to take a catalyst and put some chemicals over it. It’s actually quite a lot harder to do it in a manner that is representative of what will actually happen in an industrial application.
And we have, as I say, a lot of experience in doing this. We’re pretty good at it. Let me give you a brief examples. One olefin crackers, in each way I have to remove impurities from propylene and our catalyst out there will do this today. We’ve developed a new version, utilizing our chemistry skills and promoted precious metal catalysis. Catalyst made up of support, we then put on Palladium in a very controlled manner, a second promoter and the second promoter is what is controlling the byproduct though their actions over the impurities, but it enables us not to react to the valuable propylene in the first place.
So we end up with a catalyst that’s highly selective and because we are using this metal is of lower cost. And obviously those are benefits that are attracted to our customers. It’s been developed in-house, tested on our own rigs and is now in operation in a major plants in Europe. And we see that same catalyst having application in number of other places. So new catalyst the ability to scale it up and actually make it is a different skill set. And this can only apply to a third party catalyst that another company, another operating company for example has developed in their laboratories and they now want to manufacture. The first of that is actually make sure often to simplify the production route. We have had examples of companies coming to this with 10 manufacturing steps and we have been able to simply that and three or four.
Clearly, both creates value but also intellectual property that we can then use. We have a range of equipment to enable us to manage the risk associate with scale up both from the laboratory through to pilot scale. And the picture on the left is a pilot spray dryer, you see that in Savannah in America and so that’s putting a liquid on the top and making fine particles at the bottom. And from there we can then use that to scale to the full scale which is a picture on the right and that is the new D Plant as we call it new JMI Manufacturing Facility in Savannah. You may, if you see the little people on there, that give you view of the scale of this thing that we are dealing with and Don will talk a little bit more about that.
As I said before we are a catalyst company. Being able to manufacture efficiently globally is an important part of our business. And we focus some of, a portion of our R&D specifically on improving manufacturing process as well.
Ok, now moving beyond the catalyst. The greater understanding of the process around the catalyst creates differentiation and added values to a greater understanding of the market and process requirements. We have proven capability to build and guarantee whole processes, much of this capability today is in the JM Davy business but also Formox as well. I remember counting up, the day we commercialized 15 new processes over the previous 15 years. So, it’s a pretty impressive record and there is considerable confidence in our ability to do this. One of the features as we don’t go through what we call a pilot scale, the larger chemical plants that would be an intermediate scale of operation, generally too expensive at least not a economic asset at the end. So instead we use mini plants which is picture on the left that operate, these are small version of a full chemical plant. It will have all the features, it has all the recycles and we use that to generate design data and reassurance that we can go to full industrial scale. And we will go from test this scale up to full scale operation.
The example here is for M5000 which is a at the time world’s largest methanol plant in Trinidad and 5000 tons a day that’s over a 1 million tons a year of methanol. We introduced the completely new reactor design into that plant and we did the test work on catalysis may be just a few an inch diameter reactor. We did additional test works on modeling. This is the CFD model of what’s going on inside the reactor. And then from that we went straight up and we are confident enough to build the first demonstration of that reactor, which is the picture on the right being listed in place, that weigh 600 tons and is part of a, that plant probably cost $500 million to build. We have to convince the banks, wasn’t just us saying this. The banks and the customer and the end-user all have to believe that this technology would work and it did fortunately.
So, as you can tell we are confident in some of this stuff and it’s also we are also pushing some boundaries here in what we do. The fourth element, the final element really is as I say the technology transfer, once we have developed some interesting technology we still need to actually convince someone to take the risk and build that first plant or first, try the first catalyst charge. We do not operate the end use chemical plant, okay, we will design a technology, we will make catalyst but somebody else will operate them. So, we have to convince and that risk is acceptable. The risk management is key, the technology proof so that’s where the mini plant fit in. How do we convince somebody that we actually know what we are doing and we have done this enough times that people start to actually believe what you tell you which is just, which is good.
And then but there is also a technology transfer, actually how do you take a design successfully build it in Mongolia and work with Chinese engineering companies who will then do it the design to actually make put it into practice. And again there is a lot of skill and lot of knowledge and experience that goes into that goes into that as well. Relationships and alliances also have a key part to play here, so we have relationships with our products and hydrogen again Don will talk more about this, but they give us an opportunity to test out new catalysts and also give us market direction as to where we should be spending our R&D efforts. And finally protecting our knowledge of course is very important, we do that by series of patents, some of it we keep as knowhow, try to manufacture some of the key steps with our catalysts in house and we further add a layer of technical services around, so you end up with quite a complex offering that is quite difficult somebody else to actually offer.
Okay, so, a further example, so not only do you use this technology and capability to man and strengthen our position in existing markets but we open up new markets and so here’s an example. We’ve talked a little bit about methanol to olefins, this is conversion of, production of propylene and ethylene going into polypropylene and polyethylene, you’ve used them in plastic bags, carpets, those sort of things. This is in China that we were involved with these project supplying methanol plant; I’ll actually show you the picture of it later on. Within the process they make butenes and it’s a byproduct here, basically only just spin it back around the front effectively as fuel. Through our oxyalcohols experience we have technology; we develop technology that could covert butane to a more valuable product. So watch the animation’s going to happen here, so 2 propylheptanol is an intermediate plasticizer alcohol and it’s used in coatings on wire and cable for example. So it makes a better plasticizer than the alternative products and starts from a cheaper feedstock. And so the first of these is going into operation later this year off the back of the first MTO plant and we anticipate further, it’s just an example of how we can continue to grow our markets.
The title of this section is adding value to technology, so I guess we’ll tell a little bit about how we do that. I’ll have a go, on the right is a simplified model of how our customer would price up the production costs and the margins that they would make, so the biggest cost and this is just an example, the biggest is really the feedstock and that’s quite normal, there would be, catalyst cost is generally relatively small, that’s quite important if you remember the taking a chance on a new and unproven catalyst actually has a very small impact, the cost is, you say very little, the impact on the final product is very high, so it’s one of the reasons that actually hovering the best catalyst gives you a very good way of maintaining market position. So we have raw materials, utilities would be steam, coal and water so they’re operating costs and the cost of the plant itself would be in appreciation of internal capital employed. So those in a simple terms are the major elements that build up to a cost of production and this case 900 sales, I guess the sales price is a 1000, because it makes numbers easy and that reason they are induced margin.
If we can make improvement either, oh actually we can make improvements in all of those, what we do can improve efficiency, it could impact, reduce catalyst cost it could reduce the amount of utilities used and it can change complexity of the plant to make a cheaper plant, we can influence all of those elements, and generally so, and we would look what is the value that we bring to the final customer and we look to get 20-30% of that value. So as a general guide clearly it’s a competitive environment that plays a part as well. So that kind of fits as you like is than taken can be taken in number of ways, you could be taken on a catalyst, as improved catalyst price or it could be in license fees. Technology fees, technology transfer fees, engineering fees and services generally is of small part and we can play, we can alter how we take the value between catalysts and licensees in different markets, a different approach is merited. In terms of sort of decisive impact that we can make, about a half percent efficiency change on the existing process would be reasonable significant. You can do more but it tends to then take, if you take a different feedstock or complete different process route then we can start to make even bigger changes, or a ten maybe 10% change on CapEx again would be viewed as quite a significant step in this market.
So, to summarize the technical piece, people are a core of what we do and actually the people in the organization are very excited about the opportunity and it’s an interesting role they have, that they’re answering difficult and challenging problems and we seek out those hard problems because that’s where the value is on the ones that are easy to maintain. We are proactively growing our capabilities in R&D. It can take two, three years, a couple of years to put in a new R&D facility. So we need to be planning ahead all the time and that is what we do, both in terms of R&D and in the technical services supply that we need to provide out in the regions.
Third point, we’re pretty good at what we do and it gives us a very solid base to grow here. And the fourth is we’re very conscious we need to ensure that our advantage continues, and protecting that knowhow remains very important to us. Happy to take questions after Henry comes back.
Okay, now let’s return back to the Chemicals market. Geoff mentioned we considered the business kind of split in two; Chemicals and the Oil and Gas side. So, I’m going to talk a little bit about the Chemical sector here, just a refresher really on the global drivers and particular reference to the Chemical side. Underlying Chemicals growth is about 2% to 3% globally. So why is it that we think we can do better than that? Well inside that global growth there is actually lot of significant shifts taking place at the moment and that’s creating a little change in industry and generally speaking for us change is good, change helps us.
We are seeing continued growth in the developing regions, on end-used chemical products. China is growing at 7% to 8% at the moment. And the manufacturing of those chemicals is moving to align to that. So that’s causing change. The U.S. chemical industry with shale gases is effectively kind of going back to where it was 30 years ago. It’s being rebuilt around the improved feedstock position it has. China has an increasing use of coal for energy security. The energy demands in China will remain very significant coal for some time yet. It is going to play significant part in that. And the fourth element, actually consumers really do have an interest in green and renewable products. Again that’s creating focus in that area.
So as I say change is good for us. Actually the quantify of change is relatively unusual, I would say of my time in the business but it creates some pretty exciting times for us inside. Now just so this is a simple version, it really is. It does get a lot more complicated than this. And it is -- we try to offer just as the simple view and we’re only really looking at the larger areas. Our linkages across are relative, a lot more diverse and we have regular contacts with virtually all of the producers in the chemical industry.
We split the market, seeing gas, which as I said CO hydrogen covers chemicals derived from C1. That would be methane and coal. And this reflects increased focus on products derived from gas rather than oil. Petrochemicals are going to remain extremely important. As there are many products they realistically can’t be cost effectively made by any other source. On bio, there are opportunities here but because of a question alluded to earlier they can also be disruptive. And so we need to understand this area and I would say we do.
I can’t cover everything here. We’ve picked out a few examples of them to give you a flavor and feel free to ask the rest of team outside on some of the other areas. So these are -- the dark blue ones are the ones we’re going to talk about. Henry will cover SNG and I’m going to talk around the rest. And so we try to pick a few just across each of the areas.
We’re going to use this format through the remaining presentations. So I’ll try and give you a bit of a flavor because we’re not going to go through all the text here. There is far too much to try and cover everything but we presented it there. We’ll try and give you more of a flavor for how we see these individual markets.
So the picture on the right is growth simplification of the feedstock and product uses. We try and give a view as to what is it that we’re offering. Is it catalyst, it is licensing, or it is both? I think that helps, one of the major market drivers that are impacting this particular business and them some commentary about both the NGs markets and our position within it.
Each of the markets is slightly different. It’s actually, the master reason, the way it’s been described is different in each case, and there is a little bit of information on competitive, although we’re probably not going to dwell too much on that.
So turning to methanol, main chemical use of methanol is into acetic acid, which goes into bornyl acetate which you’d probably call from PVA glue, your children would use for the handicrafts, all going into the terephthalic acid for polyester, either in fibers or in bottles. And so it can be blended into fuel up to 15%. You don’t need to make any changes to the cars and vehicles. That kind of level, it’s already being blended in China.
On a relatively recent use of the feedstock is the manufacturer of ethylene propylene going into polyethylene polypropylene, pretty much at Chinese driven markets where they need to upgrade coal and it kind of associated with the freight capacity limitations between Western and Eastern China. Henry is going to talk more about this, that specific Chinese area.
But in methanol, we’ve licensed $25 million tons of annual capacity since 2001 when the M5000, the methanol plant I showed you the picture of earlier. So we’ve been very successful here. On the catalyst side, we have a share of the sector between 40% and 50%.
We continue to see activity in China, maybe slightly slower rate than over the last few years, but the U.S. projects are also picking up now based around Shale gas. And we actually started at one of our plants last night first introduction to feedstock. On our perspective talking to these customers, our expectation is for 6% growth here, of annual growth and that’s what we’re planning on. If it’s more than that, we’ll be delighted.
The picture here is Shenhua. This is the world’s largest methanol plant. It provided methanol into the first ethanol to olefins unit. In this particular case we design the methanol plant. We then pass that design to a Chinese company and they did the detailed design, constructed the plant. Our engineers went back to help commission and start up the plant. We supply the catalyst for that plant. And now we provide ongoing plant support and look to resell next charges of catalyst and I think we put in those resell now.
And that’s fairly typical of the kind of the rain the process technology side of the business. That plant’s being running since 2006. And again if -- sense of scale here, there is a minibus at the bottom, little blob [indiscernible], this is an enormous plant.
Moving to an area from a plant perspective is a little bit smaller. Formaldehyde is a new product for Johnson Matthey, came in with a Formox acquisition last year. It’s a fantastic acquisition. We are excited by the prospects here as it’s a logical fit, given our position in methanol. AGUS [ph] is including woodchips together into MDF-fied [ph] boards and wood panels into Ikea Furniture and so on. But it also finds use in a wide range of chemical reactions because it’s a particularly reactive chemical, overall growing at the moment at around 5% rates.
You can make formaldehyde. There is two ways. One is oxidation of a silver catalyst or you can use molybdenum oxide and that is the Johnson Matthey process. The silver of the market, about 60% is silver at the moment, 40% and so, 40%-50% is the oxide. And Formox has a high percentage of that catalyst sector, around 70%-80% market sector.
But we see significant synergies here and excited by the possibility we use and the combined scales that we bring on catalysis from Johnson Matthey and with JM foremost. And on a particular focus, if we can create a technology that is competitive opposite to silver sector then all of the sudden we are now in a much higher leveraged growth rate here, and we do see opportunities here and we actually do have plants operating in that side of the business. So it’s an interesting area for us.
So gas to liquids refers to conversion of methane to coal, bio-ethane gas to lubricants and diesel with a low sulfur content. Sussel [ph] and Shell both have plants using their own technology but this equates to a tiny proportion of the overall diesel production pool as of today. We have two sides of this market, both quick embryonic for Johnson Matthey. We license, we have a technology for licensing which we’ve developed with BP, and we supply catalyst both for the same gas production part and the Fischer-Tropsch to a wide range of potential technology owner BPSO [ph].
Low gas prices and stable high oil prices makes our projects viable and we’re seeing increasing interest in just new projects, although these projects are still early stage and generally we’ll take four to five years to construct. These are -- a typical diesel plant would be at least $2 billion to construct, which would be end user cost. So we would expect the revenues here to be hitting more of the backend of our 10 year plan. We pull considerable R&D into this area over the years and so if this market, or as this market progresses, then we are well positioned, it has the potential to be significant for PT and GBP75 million of our annual revenues, they will come from GTL by 2020.
So moving on to petrochemicals. One of the major areas is oxo alcohols, which is a collaboration with the Dow Chemical Company. We have a sector leading position, and most operating plants use our technology. The oxo reaction here refers to the reaction of an olefin to aldehyde. Products are used as industrial solvents and plasticizers particularly for PVC, it makes it more flexible. This is primarily a licensing opportunity, though we do sell with some catalyst here as well, and has been very successful over the last few years, particularly significant capacity additions in China.
The market is affected by the chemical cycle and it can be very lumpy as Geoff referred to earlier, but we continue to see a bright future for this technology, constantly developing improvements and bringing on newer versions including the TPH prices, the better plasticizer which I mentioned earlier. The picture in this case is Chile Petrochemicals. It is our first oxo licensee in China, 1978, and they continue to invest and this is actually the 2003 version of the technology, what was at that time, the latest technology.
One of the questions was, do we have a technology gap to fill. And my answer here would be, I think one of the areas that is a focus for us is the chemical production from gas rather than oil and we are keen to develop more processes that actually derive from methane going into chemical products. And this is one example of that. This is the first but we have others in the pipeline behind. So monoenthylene glycol is one of the largest intermediate chemicals. It’s a key component in polyester fiber, again PT bottles and it gets used in antifreeze in your car.
It’s a technology we’ve developed in collaboration with Eastman Chemicals, and we announced it being available to license last November. It’s developed in many plants. This was a house in the north of England and Eastman also have facilities in Kingsport, Tennessee. Conventional routes is from ethylene, but our route is for methanol, which makes it particularly attractive in China on locations with low gas costs. So this is an example on the focus of seeking technologies that derive from gas rather than oil.
It’s relatively early days but we’re actively seeking our first commercial reference now. Our relationship with Eastman prevents me discussing in any detail here, but I would view this as an exciting prospect. Attractive market, large size, particularly in China and we have an interesting offering here.
On bio-renewables; moving on to third area, JM takes sustainability very seriously in all its forms. One area is developing improved processes and catalysts for the production of either chemicals or biofuels from renewable resources, which can be from palm trees, grapeseed oil woodchips or even waste oil from McDonald’s fat fries.
We are more focused on the catalytic transformations, rather than fermentation. We’re actually already a significant player in the earlier chemicals arena. We’re the number one supplier of catalyst into fat hydrogenation and have licensed over a million tons of capacity for the production of natural detergent alcohols. It’s got a wide range of applications, including cosmetics.
So we’re already a major player in bio. The skills I mentioned at the beginning are valuable to technology companies working in this area and we have strong links to a wide range of those areas. We try to focus on those areas that we see as having the greatest potential and are well-positioned in the sector as it continues to develop.
I think this a specific question about butaned oil. We have at the moment petroleum technology for butaned oil, which actually -- there is a competing route now appearing, a biological route through succinic acid. And we’re working with Marion to actually to take succinic acid into our existing technology. So I would say it is an area that again - it can be disruptive but actually we also see it as a benefit, creates further change in the industry. If it happens, we would be very well positioned as the leading company in butaned oil technology. So actually changing the feedstock there, actually in that particular case would help us.
And that’s an example of how do we pick where we want to focus. There’s a lot of technology in the bio area, not all of it of which is likely to be economic. So we’re quite narrowly focused on things that we believe actually have potential and we do then invest at, particularly in our time in our facilities, in working with these companies to develop and introduce the technologies.
As I say, the ability to confidently commercialize technology is very attractive to a startup bio-company, to have the technology but actually they don’t have the track record and how you take it from where they are at.
Okay. That’s the end of my piece. I will now pass over to Henry, who is going to tell us all about China. Thank you very much.
Good afternoon everyone. I am Country Director for PT in China. I joined Johnson Matthey in 2006. Sorry, I'm Henry Liu, I forgot to introduce myself. I worked for ECT for six years in China, moved to PT in 2012. Before that I worked for ICI in China. And during the break some people asked me when is the Chinese New Year and actually it just happened in a way [indiscernible] ago, Chinese New Year just started, [indiscernible], just started. Clean Systems just, same the time as our event start. So we take the right time.
All right, so we did an Investor Day focus on China in year 2010. I was part of the team representing China that time. And today I’m here again. I want to report back with you what is the progress we made China during the last three years and exactly the growth opportunity for PT in China.
You already heard what Geoff said, the key changes drive our growth and one of the key drivers is the coal to chemicals in China. I will spend the next 20 minutes to explain you all the coal to chemicals in China and what is Johnson Matthey’s position in this exciting growth market.
First of all I want to give you an overview of the PT in China. We started business with an office back in 2001 and currently we have 120 people more to work with us and the number is growing. And with all the PUs operate in China currently, we already established very strong positions in our choose and played area and 58 license already signed so far, with 22 are in coal to chemicals.
Business already forecasted, working our business plan for China, with double-digit growth in next 10 years. One of the key drivers is the coal to chemicals. So why coal to chemicals? Quite a lot people just ask me during the brake. The main drivers for the coal to chemicals for China are the energy security and also economic growth. And probably you all know that Chinese economy slowed down quite a bit last year with GDP growth at 7.7, with your terms probably still very high, but we say it’s very low. So the forecasted GDP growth for next few years is still at about 7%. As I just pointed out that GDP, chemical growth demand is normally at twice GDP growth. And Chinese Government Five Years plan for the urbanization program further developed, drive the chemical growth in China.
So according to the ISE forecast that China will account one quarter of the global chemical demand, basic chemical demand by end of the decade. China imports larger amount of chemicals and the government eager to close their import deficit and China have the structured supply and demand and balance and keep importing larger amount of the derivatives. And also China imports more than 50% of its oil demand, and which caused great concern of the Nation Energy Security. With the consideration of the huge energy demand to support its GDP growth, Chinese policy maker choose to go for the coal to chemicals for its alternative multi-stock, multi-feedstock approach.
As a result of multiple investments, operational improvement, technological maturity, coal chemicals prove to be a competitive chemical route and supported by the Chinese Five Years plan. Moreover and we talk about a question to Geoff, talking about the air pollution issues emerging in the metropolitan cities and small cities in China during last year or early this year, which directly push the clean energy development plan in China.
Let’s talk about the coal to chemicals and what we refer to. China is becoming a leading player in the development of coal to chemicals and China has 13% of world coal reserves, which contains majority in the north and northwest regions. They are for fasting [ph] grow areas in the coal to chemicals areas. Normally we call it coal to substitute natural gas, coal to methanol, coal to ethylene glycol, coal to olefins.
Johnson Matthey all have the technologies to supply these sectors. In past two years, the modern coal chemical industry are developing very fast in China. In March 2012 National Development and Reforming Commission, we call it the NDRC, published the core industry Five Years plan. The program ask the areas with the right coal species and also adequate water supply to develop core to chemical projects, especially government support to SNG, olefin, coal to olefin and other local coal chemicals based on the advanced technologies, and they want to speed up the application, commercial application of the advanced technologies expected. There are a large number of the core chemicals already approved and also likely to get the approval near future.
So there are plants already in operation and the construction of pending government approval with quite a lot of projects already choosing Johnson Matthey as technology and the catalyst provider. Most of the coal chemical customers are big [indiscernible] companies and some of them are very familiar to you I would think. They are Fortune 500 companies such as Sinopec, CNOOC, PetroChina and Songhua, Iain just mentioned
Talk about the coal pollution in China, not that different from what Iain just described in his slice earlier. Among all the key coal industries, the usage of coal to chemicals is the fastest growing areas. You can see the coal to chemical fluciate from the diagram with the color highlighted in blue where Johnson Matthey has a technologist and a product service to the industry.
Johnson Matthey coal fluciate covers most of the growing coal to chemical market in China. Especially Johnson Matthey already established a leadership position in SNG and also methanol area. China has become by far the largest methanol producing country and region in the world. Iain just talked about the global market. I just want to highlight the Chinese market to you’ll to give you a little bit of flavor of how important these markets, you ask.
China and her market represent 15% of the world methanol capacity and producing 40% of the world methanol in 2013, last year and China still in the biggest pension [ph] period, adding capacity with 28 metric tons per year capacity plant to be added through 2016. Johnson Matthey has already signed 16 license agreements for the methanol projects and with four already, five already in operation with others under construction.
I will talk SNG particularly in detail in next slides. You’ve already heard, Geoff said, this is a very important area and also its majority now in China market. So the Substitute Natural Gas, or SNG we call it has grown rapidly in last few years and respective to how strong in the next few years, the SNG mainly is made for energy demand and we’ll achieve some level of the energy independence from the foreign energy suppliers and also allowing improved environmental performance for its energy users. That’s another benefit to develop the SNG.
There is increasing concern on the air quality in China, especially in the big cities as I just mentioned before, the Beijing particularly. Government launched pollution battle plan last year, Subliminal Time [ph], probably most of you heard about that. This plan include the big three cities, Beijing, Shanghai and Canton area and drive the cities to reduce direct burning the coal and also in the surrounding areas.
By the end of decade, so with the gas demand in China expected to grow to 350 billion cubic meters per year, with significant portion of the gas, we would expect will come in from SNG processes and this will, along with some of the domestic gas production, gas imported via pipeline and also import liquefied gas, which will have a diverse supply of the gas in the marketplace.
With the production of the SNG estimated to 80 billion cubic meters per year and we estimate there will be a lot large SNG plant will be built in the next few years. So far nine SNG projects already achieved, come in for approval with capacity up to 23 billion cubic meters per year. 13 projects already acquired government preliminary approval. I will explain to you what does that means later on, with capacity up to 54 billion cubic meters per year, which is consistent with the target established in the Chinese Government Five Years plan.
So just to give you a little bit more about what approval means and what we mean, preliminary approval or full approval. Preliminary approval means, if you get the preliminary approval you can start the project work, you can the selection of the technologies and also start the construction of your plant. Full approval only when you want to have your plant to full operation. Then you need a full approval. So in sense, with the preliminary approval actually you can build your plant. That is a milestone for any coal to chemical projects in China. By the way all the coal to chemicals big plant needs government approval.
Johnson Matthey’s first success in this market was achieved with the license technology to that time [ph] in 2009. This plant began operation in 2012 in Mongolia, close to the coal sources and with adequate water supply in that area is now successfully has poured the gas to the Beijing market, which now is contributing Beijing air quality now. Johnson Matthey has now signed license agreement for seven SNG projects in China, hence established a leadership position in the market. Currently we mainly compete with Topsoe and Lurgi in the marketplace.
So not surprisingly you were thinking, there were be local technology and catalyst and a development currently in China. Our offer to the market is package of license and technology, engineering service and catalyst supply. A typical project, just to give you some flavor what’s that means to us, using probably around GBP7 million to GBP8 million worth of catalyst and the GBP3 million to GBP4 million of the engineering and licensing fee, which will give us estimated as a market size about GBP300 million to GBP400 million by end of the decade from now for the new plant.
Catalyst life, as Geoff just highlighted in his area, just talking about the life and above, sometime around three years. So that significant part allow our business will come from retail business in future. And estimated market size about GBP50 million to GBP100 million when all the plants are running.
To service this important market in China, we have invested our strong commercial and technical service team in China. So you already heard we have 120 people there. Most of these people are engineers and also sales people. We are developing plants for investment of a newest catalyst plant in Shanghai to service this market.
[indiscernible] key question to say how we -- what we see ourself in the market and do we have -- can get the retail business in future? And we are quite confident, the reason for quite a few of I already explained to you all clear. Johnson Matthey has established a very strong positions and [indiscernible] fit well with the market requirements in China, which positioned ourselves with all the advantages. As Geoff and Iain explained, the value of the catalyst that we supply to the processes such as SNG or methanol is quite high that, several million pounds. The methanol -- the value of the catalyst is much lower than the overall project. What are we talking about is several billion pounds. All the valued clients can use our product to make their product which is several hundred million pounds a year.
So hence all the customers always push us to lower their catalyst price, but they’re often reluctant to switch to the improving catalyst which probably will jeopardize their asset or plants. So they wouldn’t do that. We haven’t seen that happening, especially in our methanol plants which we signed license for.
Johnson Matthey continued to develop and improve the technologies and catalyst as the industry planned. We’re set ahead of our competitions. We have successfully done that in methanol market. We will continue to do that in SNG market.
Provide improved to local technical support and service because another step ahead of the competition. We have invested heavily on technical support capabilities in Beijing to provide assistance to our customers to get best value from our from our products. This service is available in customer language and also their time zone and also can draw our global technical service from a wider Johnson Matthey team.
Closer client relationship, as Iain just explained is another step we are now developing. This is partly as consequence of providing more effective local technical service. Localization of the catalyst production is another step we allow planning. We are planning further investments, increase manufacturing patents in China. Localization will give us flexibilities in meeting our clients’ needs.
Overall Johnson Matthey has a long -- PT has a long history in China. Iain just said we licensed also to [indiscernible] in 1978. So we have a long history in the patent record in the market. We licensed over 22 projects in coal to chemical sectors so far in China where we as a brand is very famous in the industry. And we already established very strong relationships with these key players in the market as I just illustrated in the [indiscernible] the Sinopec or CNOOC or Songhua. They are our customers. They are already experienced our technology and service already.
A lump of the technologies from Johnson Matthey choosing for this demonstration program called in China and through this demonstrating programs industry people understood that by choosing the advanced technology is the key steps for award the project success. And with the continuously development for new technology and products, Johnson Matthey is ahead of the competition in our choosing played area, especially the methanol SNG areas in China. So overall Johnson Matthey, we’re positioned to the rise of the coal to chemicals in the China.
That’s probably all from me. So Geoff, I probably will hand over to you summarize the section.
Okay. Thank you, Iain. Thank you, Henry. And I’ll just real quick wrap up, then we’ll take questions for 10 minutes, 15 minutes, something like that do something like that. Well not much more than it says there on the 10 strong positions in target markets. We talked about good positions we have before methanol, ammonia. And we got some pretty aggressive plays in this area in substitute natural gas area and in gas to liquids. So a couple of big wins for us with market develops and we’re getting prepared for that to happen.
R&D is going to feature long term for us in this business. It’s how we carve out different niches in the marketplace and it’s really how we want to grow the business going forward. We’re looking long term to capital spending. We’re building plants now in anticipation of market growth. So we’ll be well positioned to win when the markets do develop. And couple of big opportunities there. We’ve touched on those through some of the markets but I think we’re in a pretty good position in this area as well.
So that’s it from me. I think we’re going to take a seat. The three of us were going to take the hot seats and open it up to questions.
Geoff Haire - HSBC
Geoff Haire from HSBC. Two quick questions. My math may be slightly wrong but you’re targeting GBP400 million of sales in your total package for coal to chemicals technology. If you’re getting GBP 10 million or so of sales, that implies 30 to 40 plants that you’re going to win. What percentage of the market share do you think that will be, you’re targeting? And the second question is on the environmental side, my understanding is that coal to chemicals is one of the most carbon emitting processes certainly compared to petrochemicals and natural gas. How is the Chinese government looking at their sort of overall carbon footprint versus the carbon footprint in cities and could that change going forward?
Okay, I think that’s a very good question. Talking about the market value, we’re talking about GBP300 million to GBP400 million. That’s for the new plants which is start from now to end of the decade, and which we believe is quite a good chance for us to win this whole the part of this business. You’re talking about the footprint of the carbons in China and it is really in a good sense -- topic and it’s part of debate now in China. And we know this is a part of issue of the CO2 emissions. But our technology, compared with alternative technologies, we have advanced to reducing a lot of these issues and we have the advantage there.
Bu having said that government -- Chinese government, to see that as a strategic approach because -- and they say that is strategically as I’ve said in my slides earlier because they’re pretty large, energy security is important, very important strategy for China to go for. And there is a plan there and they’ve taken balanced view to that to see it and because they are already starting to cut a lot of less efficient plants such as in steel areas, and also they are talking a lot of renewable energies such as wind, hydro and solar, which also help reduce a lot of CO2 emissions in China.
So overall that’s the good of Chinese government doing since. They’ve planned very well. That’s why they’ve all approved since. They don’t want to get out of control. And they do it a controlled way. So I don’t know whether that answers your question.
I think I’ve have got one question for Iain, and one for Henry; the one for Iain, it’s a bit of a debate on shortage, or not shortage of C4 stream in the market, as far as I understand, one of the bottlenecks to get LPG or one butane back into butadiene is the dehydrogenation catalyst first responding of transmethane as the holy grail in the pipeline there to help the petrochemical industry. And then question for Henry is, you quoted Lurgi as one of your competitors in coal gasification. The Lurgi process is much older than the Davy process. Yes, we get you’re winning twice as many projects. Is there a technology angle there or are you just clever as sales people, or what’s happening there on the win rate versus Lurgi?
I’ll take the first one. So the C4s and the shortage of butadiene, was that the question? I would say it’s an area of interest, let’s put it that way. And it fits very well with our capabilities. We just don’t have anything to announce just yet but certainly an area of focus.
Is this in phase 1, phase 2, or phase 3?
It’s showing a lot of promise. I’m not that sure to define it as 2s or 3s, but it’s -- yes, we’re in good shape.
Okay. In terms of the Lurgi in a competition, would you see them, because this is a growing coal to chemical. Everybody see it as a big market and it’s growing and try to get into there. And they are -- because also another, since you see a lot of corruptions going on in China, every peak -- we’re talking about our customers are most of the big scheduling companies. They all need it in white and this is two to three technology provide to their profit. So actually they were getting in white yet, that’s a [ph] lot surprising and you know, they were in white more than one to beat for that project. So there are a lot many today in the marketplace to select for.
But in terms of the question around the Lurgi technology, they are older technology, the offering we have now is significantly different and actually our catalyst is in that plant in the states. So as well they just moved on. The operating condition is quite different with that technology now.
Can I just maybe, excuse me for pulling up, there are different kinds of coal in china, which contains a calorific content. Are you particularly strong in high-thermal or low-thermal content?
The gasification side, we don’t participate in. So there is no catalyst there and it’s a competitive area with lots of people already playing there. So we don’t actually get involved. We take it from Zinc gas, in the gasification end.
And Davy is the same, there is no; thank you.
Thanks, a couple of questions. The MEG joint venture if you like, with Eastman, a couple of questions; that looks like a decent sized project. Are you exclusive on that? And secondly what’s the timeline on that?
Yes its exclusive with us and it’s technology we developed together. So that’s ours, and the timeline is, we’re starting to talk to customers. So we will anticipate that’s now going to take probably 6 to 12 months I guess to actually get the earliest for the first contract I think. For this we’re now just starting to talk to customers about it and test the market.
And a follow-up, the second question; sorry China and coal again. I saw an energy review paper this week from the government showing targeted 3% for coal production in china. This is probably an ignorant question because that’s whole of coal production and I saw your comment about power generation being deemphasized. My simple question is, is there a debate in China about the availability of coal for chemicals being an issue in the future? So could that be a bottleneck? Could that be a risk for your growth rates?
That’s a very good question, and actually we incidentally also evaluated that so. And actually there is enough coal there for more than hundred years, if we continue this way, today, and also that’s proven reserves and also we see there is a quite more there. And also our neighboring countries such as Mongolia, they have a lot of coal there. And if we try to see, that’s a competitive chemical route in future and longer term. Still that is available for us to use, such as Indonesia and lot far away from China.
From that perspective we don’t think that’s a bottleneck for coal to chemicals. And yes, you put a good question. Actually coal to chemical today is only, even say a quite big growth but in terms of absolute portion, it’s still small, it’s 7% among all the core industries. So, it’s small today and it’s growing and other areas you see not much growth or even some areas you will see the reduction there of the coal.
Thank you. Just two questions from me if I can. The first is a lot of the growth is clearly coming from increased investment in certain industries, which we are seeing a lot across just a chemical space generally at the moment. To what extent is the risk of over capacities in some of these markets a threat to the catalyst consumption or does it not work like that. If plants reduce utilization rate so they just consume the same amount of catalyst, to what extent -- because nothing ever goes up in a straight line from a compound growth perspective. So I’m just curious as to how that can fluctuate? And then in terms of the margin expectations going forward is clearly positive in PT business in general. Where are the highest margins coming through? Where is the mix effect in terms of those end markets? Is it from coal to chemicals, SNG, gas to liquids? Could you help us understand where the mix is really driving that margin up going forwards despite the investments?
Let me tackle the last one, last one first on margins. I would say that we typically get the highest margins where we can leverage the flow sheet expertise in the catalyst. And I think the Davy business, I think you have known from previous analysis the margins are pretty good. So anytime we can do that, that’s where we will win. So I’m not going to go in more details by product line on that. Sorry, kind of just clarify question, your first question, when you are talking about overcapacity, were you talking about in the end markets or were you talking about in the catalyst?
No, no in the end markets.
In the end market, okay. Yeah go ahead.
I guess it depends a little bit market-to-market and yes you are right; the catalyst life is consumed by the amount of chemicals it makes. So if it’s not operating then generally it won’t get consumed. A little bit more complex than that, because actually in certain markets the, if you like, the swing capacity of say methanol in China, the swing capacity is small Chinese plants that probably don’t use our catalyst so much. So actually the ones that are -- the bigger and the more efficient that ones are going to concentrate on using our catalyst are the ones that are going to be the last to shut down. So there is that. So yes the effect is true but actually we are probably slightly less affected by it than maybe others.
Continuing the theme of two questions. So, first of all for Henry, on the formaldehyde catalyst side, could you explain what the benefits are of the non-silver catalyst approach compared to the incumbent technology? And I think you mentioned that the non-silver market is about 40% today. Can you give us sort of sense what might be a reasonable expectation in five years for its share of the overall market? And then another one for Geoff, with regard to resourcing the U.S. opportunity, the GTL and petrochemicals opportunity, will you need to add additional resource to U.S. operation side in terms of manufacturing capacity or people in order to address that opportunity towards the end of the decade?
Okay, let me do, I will do mine while I can remember the question. On resourcing, yes, we will definitely have to add more people in the U.S. We are looking to do that now already in terms of some of the technical, some of the sales people, probably a bit R&D. But if we get a gas to liquids opportunity in the U.S., yes it’s likely that we would be putting a new manufacturing plant there. And on formaldehyde, do you want to take that, do you want to pass to?
I will take it or you want to join?
I can do the first bit. So yes, the difference between silver and the oxide process, generally the silver process is lower capital cost, less efficient. The oxide is more efficient but is more expensive. Actually that gap in terms of capital cost is closing quite rapidly as well. So that’s basically the swing. So the small producers, distributor producers, particularly into China are tended to go to silver. So, that’s the opportunity for us is to actually to focus down, get the capital cost down and that would be what our target is. I think it’d be difficult to say what their expectation of how successful we’re going to be on that and [indiscernible].
Okay. Maybe a couple more and then we’ll take a break or if that’s it. Okay there’s one from the back.
Rakesh Patel - Goldman Sachs
It’s Rakesh from Goldman. Just two quick questions if I may. First of all, I wondered if you could give us some sense of the proportion of your R&D stats in China. I’m just looking to see how that compares to the group overall. And then secondly, notably there seems to be absence of your activities in the Middle East. I see you’ve only got two offices there but I wondered perhaps if you could give us some color there. There does some to be some petrochemical build out.
Okay, in terms of R&D as of today I would say, we’re not doing very much, but it is an area that we are currently planning now to start to build up. I think you have to ask what’s the purpose and I think it would be around more application, particularly around specific products for the Chinese market rather than an expectation of doings for the core and fundamental R&D out there.
Rakesh Patel - Goldman Sachs
Just to infer, is there some impetus from the government for you to have your local R&D staff there in order to sort of gain those contracts.
I don’t know, there’s no, I don’t think so. I’ve not come across anything.
That’s a long term as we see and that’s why another strategy, we want to localize our production and we want to see to be a Chinese company as much as can. So that’s -- today we didn’t see this stretch and there’s no such thing as you have to be a Chinese company or Chinese technology then to be selected. We didn’t see that problem today, but long term if the market continue to grow and we see that a long time stretch and we have to be to see as a local company as much as we can. So that’s the plan already developed.
In terms of the Middle East I don’t have exact numbers to finger but I’m guessing that Middle East represents about 10% - 12% of our sales, something in that area. I can check that number and get back to you, what we have in the Middle East and we sell into methanol, ammonia, hydrogen. We’re selling our additive products now in the Middle East. So we sell a pretty wide grouping of things and we’ve sold -- I think we’ve sold some oxo license in Middle East as well. So, yes it’s an important market to us. We have a number of technical people, technical sales people who are based there.
Just a quick follow up on the business model in general. So it seems like the main revenue drivers are licenses, flow sheets and catalysts. What about the aftermarket service part? You mentioned that technical service in these kind of things is a part as well, and the risk is a bit infectious that you’re ending up painting the doors of your customers and do a lot of things that help you be loyal with the customer but not getting paid for that. How important is the aftermarket sort of technical service and are you getting paid for that?
Well we would say that painting the doors of our customers is one of the differentiators in the overall service that we give to them and we would say that we look to continue doing things for them and helping them run their plants as part of the premium price that we get over some of the competitors. So I would look that that’s going to be a continued part of our -- continued part of the package of things that we sell. It’s really one of the ways that we differentiate our services versus some others.
Unidentified company representative
Okay why don’t we break now for 10 or -- 10-past Sally says, so it’s about 15 minutes from now. And we will come back and we’ll get Don Roche talking about oil and gas.
All right. It looks like we are ready to get started again. The good news is I’m the last presenter of the day. So I know you are all glad to hear that. The bad news is I’m standing between you and a nice glass of wine and what sounds like a lovely dinner that we have planned for the whole group after the presentation.
Geoff wanted me to mention one thing quickly to you. There was a question earlier, I don’t remember where it came from. It was talking about the sales in Middle East. Sales in the Middle East as a percentage is about 7% of our sales, just to correct that point if we had made that wrong.
So, let me introduce myself. My name is Don Roche. I am the Director of the Oil and Gas businesses for JM. And I have been with JM a grand total of almost three months now, so pretty new to JM. Prior to that, I spent 30 years at Shell in their Refining and Petrochemical Downstream space. The last seven years I spent running the chemical catalyst, CRI catalyst business for Shell.
I am really excited to have joined Johnson Matthey, I think particularly because there is such a great opportunity that I see for growth in this technology and market space that we are participating in. So I think there is grand opportunities here and hopefully what I can do for you today is give you a feel for the oil and gas sectors of the business that we participate in, give you a feel for where and how I see things growing for the company in this space and what maybe the opportunities are for us.
So if I can get everything working here. So just to remind you, I know it’s been a while since we talked about this. The oil and gas sector of the PT portfolio businesses, it’s about 40% of the overall PT sales. So, it’s about GBP240 million, GBP 250 million per year. So that’s sort of the frame and the scale of the oil and gas businesses for Johnson Matthey in this PT space.
A couple of key points that I want to make to you here. I mean what we break it down and you heard this from Geoff. So we break it down, we talk about the oil and gas sectors, the refining. We talked about it as gas processing and diagnostic services, that’s how we break it down.
As you can see, refining is the largest piece of the business for us. The refining catalyst business is the largest piece. What you will see is for us, as Geoff showed earlier, our growth rates in the markets that we participate in are above average I would say, above what you see for GDP growth and above what you see traditionally around the larger oil and gas industry in general.
I think what’s interesting around these kinds of business is you look at the strengths we have as a company, around material science, around process expertise, around catalyst development and around analytical and measurement capabilities. I think that’s what brings real strength to Johnson Matthey in this space. It really creates opportunities for us to enhance the products that we make and capture value for ourselves and our shareholders.
So, you saw this from Geoff again. He stolen all my slides, this is a breakdown of the business. I’m going to into more details around refining hydrogen and refinering FCC additives business, but I want to talk in a little bit more detail right now on gas processing. So, just to give you a feel for what we do in gas processing in our oil and gas businesses here is that gas processing for us is treating sulfur. So these are adjure bends or its chemical technology, catalyst technology if you will that we have used to treat sulfur that’s found in natural gas. So we will build reactors, we will design reactors and we will put catalyst or absorbents in these small reactors to treat sulfur that before it goes into a natural gas pipeline on into LNG facility to get those contaminants out, so they don’t ruin the process. So, that’s one of the key functions that we provide.
We do the same thing for mercury removal around natural gas. So that’s the core of what we do around our gas processing business. Now this industry and this part of the industry is changing dramatically as we all hear. You see quite a lot of information in the news around the increased drilling for natural gas around the world and different levels of contaminants that you see in different parts of the world.
So in the Middle East for example, we are seeing a lot more sulfur. So some of the things that we’re working on is getting into the units and the facilities that they need in the Middle East to treat sulfur. In Africa and in Southeast Asia, they seem to have a bigger and bigger problem with mercury in the natural gas that they are finding. So treating mercury before it goes in these big LNG plants that you see down in Australia, those are some of the things that we’re doing in this natural gas processing space, this gas processing area of our business.
The trends in this industry are also around moving towards lower CapEx, more capital efficiency. You’re going to see this big in the news. I know all of you see and follow this but capital efficiency is a big part of what’s going on in the drilling industry. So one of the things you see for example is floating natural gas, floating LNG. So the key, the issue around floating LNG is getting CapEx down.
What they say, more people claim around floating LNG is it takes a third of the CapEx out of a land based LNG plant. What we’re doing in the gas processing space is working to design and reduce the footprint of our equipment to help treat the gas, to fit it on a boat with a smaller footprint, to help reduce the CapEx and enable the idea of treating LNG, treating gas, getting in into LNG and then shipping it around the world.
So once the change is going on in this particular space, we’ve got a small but targeted area that we participate in this gas processing space, but it continues to grow and it continues to be really an attractive space for us where we make good money.
The next area I want to talk about in a little bit more detail is the diagnostic services portion of our business. This is a space where we bring quite novel technology and expertise and skills to some very unique problems that the oil and gas industry face. We’re looking at things like for example taking chemical technology and analytical skills into fracing. So we can help an operator who’s fracing a well understand where he’s getting oil, where he’s getting gas, where he’s getting water as he’s fracing a well and he’s drilling and actually help them to optimize and change their operations and reduce the inefficiencies of where their frac costs are.
We also take this technology and our skills if you will into another space into the subsea. One of the big issues that we’re facing in the industry is we’re going to deeper and deeper depths in offshore applications, we’re going into the Arctic and in applications like that we’re putting production units if you will on the sea floor, 3000 feet below the surface, and we’re actually putting equipment in those subsea production units if you will, that actually help the operators manage and operate their equipment at these very low levels, managing the gas compressing units, managing the separators that actually wind up in the subsea. So, really quite novel and quite difficult problems that the industry is facing.
We also provide, last example for you on this, but it’s quite unique; it’s around being able to analyze without being intrusive around the separator. So for example, when you run an oil and gas rig, you’re going to have a vessel that all the oil and gas comes out of, you wind up with oil or gas and sediment in your vessel, they call it a separator. We have equipment and capabilities to provide services to help the operator figure out when a slug is coming up the line. It’s going to wind up plugging up their separator and actually if your separator goes down, you’re in real trouble, your production goes down.
So what we bring is capabilities to actually help the operators figure out how they’re running their equipment more effectively. So quite unique and quite interesting technologies and capabilities that we bring that really add quite a lot of advantage to these oil and gas operators in the field.
All right. Now I’m now going to dig into some details. You’ve seen this before. Hopefully you don’t go to sleep on these presentations. I’ve only got two slides here that I’ll talk about in this kind of detail.
So the first is around our hydrogen catalyst business. So the hydrogen catalyst business, again just to scope it out for you, this is a narrow but targeted area where Johnson Matthey has had a unique advantage for a very long period of time. Roughly this is about GBP150 million to GBP200 million per year type business. That’s roughly what we think the market is for this. And we get about 40% of that total.
Now of course you know it changes right from year to year. You get new units that are brought on and you get refill business that adjusts those numbers, but you can see from the totals we’re really quite a strong player in this market and have been for a long period of time.
Now what’s interesting, this is a complex market; someone asked a question earlier, must know quite a lot about this but the industrial gas portion of this business or segment of this business is a very important part of the hydrogen market, a very important customer segment for the hydrogen catalyst business. So players like Air Products, PracsAir, who go out and build hydrogen plants to supply to refineries or petrochemical plants, that’s a big segment of this market. One of the advantages that we’ve had in building and growing this hydrogen catalyst business has been actually to partner with folks like Air Products and PracsAir, to really grow our business together and find strength and capabilities as we move forward.
Keys to success in this business really is around the core strengths of JM, which is around building better catalysts, it’s the material science research that we do, it’s understanding the process technology of how hydrogen plants are built and how they operate, but really this is a technology play. It’s around having the best product, having it at the best most reasonable price that creates the most value for the customer and also provides a good value back to JM.
I’m going to dig into this next area and this is really quite interesting space for me. This is the FCC additives business. This is one that you’ve heard from Geoff earlier. This was the Intercat acquisition that we made back in 2010. Interact was an independent company and they built actually quite a leading position around FCC additives. And what they brought, when we bought them, what they brought to JM was actually quite some interesting skills and capabilities around fluidized bed processes. So it’s quite a different set of process conditions and economics than you see with fixed bed, which is traditionally where we work in the Davy area.
And they also brought to us actually, to JM actually, some really interesting material science capabilities. So around these FCC additives we’re dealing with mesoporic materials, zeolites and unique materials that actually have been used around the FCC additives business actually for quite a long time.
We’re excited about this space. Now that we put the market growth, this market is roughly about GPB150 million per annum and again we have about 40% of that total. So, really quite a strong position now. The definitions around this market are little difficult because it’s not exact of the same everywhere. You get big players who sell the base catalyst and they include the additive with the base catalyst. So it’s hard to get exact measures, but that’s roughly what we think the size and scope of this market is.
But there is a lot of good opportunities and this continues to grow. The changing environment around refineries, particularly we mentioned it earlier. I think as chemical industry changes, the refining and petrochemical industry are coming closer into integration. So what we’re seeing is big issues as the chemical industry changes feedstocks, move towards lighter feeds, they’re running into shortages around propylene, you’re running into shortages around C4 coming out of your chemical crackers, you’re running into shortages around aromatics. So we’re creating supply disruptions.
Now refiners are sitting over here; these greedy refiners who make FCC units and make gasoline and other components out of these FCC units, they’re sitting there looking the same way. If I put this unique additive from Johnson Matthey end, I can make more propylene out of my FCC unit, potentially I can make more C4s out of FCC unit or potentially if JM gets really creative they can do some other things to create chemical products out of what’s traditionally been just a refining engine. The FCC unit is the heart of a refinery. So a few big key kits of conversion in a refinery and FCC unit is really one of the most important units in a refinery.
And so if we can help the refiners actually start to make more margins by making chemical products out of their FCC units really, helping them to not only diversify but actually step up their margins that they’re making out of their FCC unit.
But what I’m going to leave you before I turn the page on this one, I mean, I think it is quite an important story. What I threw up here, what Johnson Matthey did for this business I think is really quite impressive. Johnson Matthey took an independent company and wound up committing resources to expand the capacity.
So we’ve just completed, I think Iain mentioned it earlier, we just completed the expansion of a new plant at Savannah. So a $45 million plant that you see over in the right with that fancy picture. We’ve invested quite actively actually in the R&D in Savannah. The picture on the left here is micro-reactors that we use actually to test the catalyst, the FCC additives in application environment to determine and develop new products and actually do product quality, assurance testing et cetera.
But we’ve invested quite heavily in the site, in autoclaves, in new testing equipment as well as analytical equipment, which I think is really quite critical because as the analytical capacities that Johnson Matthey has brought to the Intercat business that has really enable quite significant breakthroughs in understanding the surface science of these mesoporic materials and the surface chemistry on how you can start to make changes, develop new products and create new opportunities.
So it’s really quite exciting, quite a good environment where the trends are moving towards very favorable for us because it means our customers, our FCC unit operators and owners are looking for new products and new opportunities to put additives into these FCC units to change what they make and to change how they make them. So really quite a good story from multiple perspectives I see from the JM perspective.
Okay so here is my interesting cartoon and I’ll say to you we’re early on in this journey within JM with the PT organization, but I just mentioned this. One of the things that we’re starting to see is how do we build and expand on and leverage the capabilities that we have across the whole PT portfolio.
So one of the things that then I see that I was just talking about. For example, this Intercat acquisition, where we took fluidized bed technology, process technology, we took zeolite material science capabilities. What that starts to open the door for us is for example as it moves over into the chemical space, when we take fluidized beds and zeolites into the chemical space, it starts to open the doors for us potentially to get into processes like methanol to olefins, methane to aromatics, a number of different chemical processes that actually use fluidized beds and zeolites as we move more towards the gas oriented feedstock for the chemical industry. These process technologies and these materials are going to be critically important and open doors for new opportunities for us moving forward.
On the other side of the fence coming back, the expertise that we have in Davy around fixed bed processes and fixed bed analysis, base metal and PGM catalyst are actually quite applicable to many and most of the refining applications that we have. And so there is quite a lot of synergies and a lot of opportunities for us to leverage skills and capabilities across both sides. And then underlying it both and Iain spoke to this as well is that, and I’ve seen quite a lot of this actually around the Savannah site first hand, is that manufacturing excellence programs that I see going on in Johnson Matthey now are some of the best that I’ve seen in my career. We’re really making significant improvements and I’ve seen a real strong culture around lean six sigma in Johnson Matthey and that’s making a real difference, it’s driving cost down it’s really driving opportunities.
Now I know nobody is going to probably stand up and say its changed their results for this quarter but I think the reality with lean six sigma is you make it a cultural change and that’s how you find on going continuous improvement in your operating cost. So I see that and I see that going on and see that as a real capability that as we grow this PT portfolio, this is going to be one of the areas that we’re going to have to leverage and it’s a strength that we’ll leverage as we move and grow, add more plants, make more acquisitions. These are the kinds of things that we can leverage in my view.
And the last one that I mentioned is this research and scale-up capability. This is the core of catalyst development in the catalyst business, being really good around material science expertise, your analytical capability to understand things at a molecular level, be able to scale it up, take things from the lab and actually scale it up to full scale manufacturing. This is, I mean the Davy process technology scale up these many plants, I haven’t seen that anywhere in the industry. In my 30 years being around I haven’t seen that kind of capability to scale things up anywhere. And I think that’s the kind of things that are unique advantages that we’ve got to start to deploy more broadly.
So move on from that, and I’m near the end here. So we’re getting close to the finish line. This is one of the last charts but I want to leave you with a few key messages and this is one that I want to say; the trade winds are blow in our direction. I’m a sailor, so I have to use my sailing analogy here. The trends are moving in our direction. We have changing feedstocks, we’ve got Shale oil in the United States which has more metals, that more metal heavier metal content, the oil that’s being put into refineries in the U.S., it’s opening new opportunities for us for these FCC additives to treat these higher metal content, the Shale oils. We’re seeing Shale gas, which is opening the door for more activity for us in our gas processing industry, more drilling in general which is opening up more opportunities for us in our diagnostic services business.
The drive towards cleaner fuels, Geoff talked about it but around the world, now actually even with Shale oil and I’ll talk about the United States, being an American here bit is that the United States we keep talking about being energy independent but now the United States is going to all of a sudden going to be exporting gasoline and diesel. And so the standards around clean fuels actually as the world starts to transport and export transportation fuels, we’re going to get to a normalized standard actually for low sulfur which is going to drive more hydrogen. We’re looking for more diesel in the world as a clean fuel. When you need diesel, you’re going to have to both hydrocrackers. When you build hydrocrackers, you’re going to need hydrogen plants. These are driving changes that are helping our core set of technologies in the businesses that we’re in and it’s going to drive our growth over the next five to 10 years.
And I kind of probably be a dead horse here around the capabilities but I really feel strongly about this. I feel strongly that it’s the strengths that we have around material science, it’s process expertise that you’ve heard from all of us and it’s catalyst scale up and development and it’s analytical skills and capabilities. That’s what’s going to create an environment where I think we’re going to be in a position for accelerated growth, building new plants in our existing businesses, building new research, creating new products helping to improve our margins, but then also positioning us well actually to make targeted acquisitions in adjacent areas. That’s what I see as a real strength going for forward.
Okay last chart, I know you’re going to -- you’re relieved now, everybody taking deep sigh. I want to leave you with four points. So my four points that I’ll leave you with here are, leading positions is where we have, this oil and gas technology, although not enormous but we have very strong positions in the parts of the business that we participate in. The segments that we are participating in are growing faster than the market. So this is very attractive spaces for us to be in.
We’re continuing to invest in the capabilities that we have. So our R&D investments are continuing to grow. We are building more testing equipment, we are building more capabilities. We are adding more scientists to continue to add to your advantage around our skills and capabilities and products that we offer.
We’re starting to leverage that grand cartoon that I wrote. We’re actually starting on this journey to try to leverage and open up opportunities from the capabilities that we currently have. And I think that’s the real strength of growing a company. It’s building on those leverage and those strengths that you have.
We do have opportunities to accelerate the growth of because of the trade winds, but because of the capabilities, I think it puts us in a grand position actually to continue on the path of growth that we’ve been on and do better than double. We anticipate currently now doubling our revenue by the end of the decade. I think if we continue down this path and we leverage these skills and capabilities, I think we have ample opportunity to do better than that over the next 10 years.
With that I’ll end and I’ll let Geoff wrap it up.
All right. Well thank you Don, especially for reminding us that you’re an American and I’m not sure how many people actually picked that up along the way. So, no, okay. All right, so where are we? Well, I thought I’d just wrap up in a bit. I’m not going to regurgitate too much in that slide. It’s a similar slide I went through before. Before I wrap up some of the themes of the day really, just thinking about the technology part of our business. Just a reminder that the sweet spot for us is the confluence of the flow sheet design, catalyst and the know-how; really just putting that altogether, for us to carve out a unique place in the marketplace.
How we are going to do that; continued investment in R&D and a look to the future. And we’re doing that now. We’re expanding our R&D capabilities in Northeast, putting that we’ve just ready to open a new facility there. We’re going to be adding in Savannah. So it’s a key part of what we’re looking to do in the future.
In this chemicals area, we talked about syngas, petrochemicals, oil, bios, really how we want to look at the businesses; quite keen to expand those areas. And we want to anticipate the growth that’s in the marketplace, so resourcing up for that now, looking to putt new plants in, new capacity, and put it in the appropriate parts of the world for us.
On oil and gas; well Don just went through additives, hydrogen, gas processing and our diagnostics areas and looking to expand there, I really like the thoughts we have now and how we leverage in some of the newer acquisitions and potentially something broader overall for the company.
So some of the themes that I guess, jotted down, I look and listen, constant theme on the technology, performance products, talk about analytical capabilities, the market knowledge, investing for the long-term. Really we’re trying to do all that. We’re playing to win and we’re looking forward and we want to win in this game.
Just a couple of things maybe on some of the numbery type parts, just give you a little bit more on the sales, on the sales growth prospects. If we look at methanol for example, I think we talked about 6% to 7% growth, and it would be lumpy. There is no doubt about it. It depends on what happens with customers.
Ammonia, we think should be steady, but I again new plants come on, that could be long lumpy. The substitute natural gas, bit of a ramp up the next couple of years, pretty steep growth and then probably level off a bit. Gas to liquids, well that’s again a big play for us, and hopefully some better revenue next 3 to 4 years and if something takes off, then the revenue will take off pretty quickly on the back of some big investments.
And some of the things in the refineries area, we think we would see pretty stable growth in those areas. So got a bit of a mixed bag, and that some lumpy, some coming later on in a decade, and some happening now.
So all told, we think that there is scope for us to take the revenues from just a bit south of 600 million sales up to something approaching a billion sales by the end of the decade. So depending on a couple of, how the trade winds go, it’s going to be upper single-digit, maybe low double-digit sales growth. When you look at margins, right now the chemicals area is roughly 20%, oil and gas mid-teens, expect that to stay the same. We will certainly push hard to try to improve it but I don’t see significant changes in those. Along the way we’ll look to get a lot closer to the JM group target of 20% on the return on capital. So hopefully it’s more efficient use of the capital that we have put in place.
So, all that in tow, well, I think that’s probably it for me. So I think Neil is going to coming up, do a bit of a wrap up and we have bit of time for both, sorry I am doing questions now. Well Neil, you can take the questions. So we have 10 minutes for questions or something.
Yes, and I didn’t really need to do much of a wrap up I don’t think because that’s all been really very well done by Geoff and his team. I hope you will agree. So, while they are assembling just, really just a few thoughts from me and they go back because I go back a long way in Johnson Matthey, but in the year 2000 we had nothing here. We had a few small products in the PGM on the supported PGM area, a few million of sales. I doubt it was 10 million, I forgot the numbers in my head.
And then over the next few years, as Geoff has painted the picture for you, we don’t make a lot of acquisitions in Johnson Matthey because, but when we do make them, we put a lot of care and attention into making sure they are the right ones and I think you’d will have to agree that the four key acquisitions that we made here, starting with the ICI business Synetix as the kind of base load, base understanding in non-PGM catalysis and then adding in Davy. Davy, it was a company we’ve known for 40 years and worked with alongside for all those years but someone had the clarity of thought to say this would really fit nicely with the Johnson Matthey business amazingly. They have been owned by a lot of people but never buy a catalyst company and catalysts are an absolute keystone of the processes that they put together. That ended up a fantastic acquisition and then along came Intercat a few years later.
And so that collection of acquisitions has made a massive difference and now, okay, it’s 20 years later in 2020, Geoff is talking about GBP1 billion worth of sales where they were none 20 years ago. Okay, that’s 20 years, that’s quite a long passage of time but the trip from where we are today, I now see that we have got all the pieces in place here, hope you agree. And the trip from here of GBP 600 million to GBP1 billion seems like a pretty robust thing.
You have heard from the guys, you have heard from Geoff to paint that picture, you have heard from Iain and the key things that I think you should take home from Iain are that we’re good of the technology, we are really good of the technology. He said so. He is a very understated kind of gentleman. He said it about 12 times, it’s true. We are very good at the technology and you have to be to take a leading position here.
We are well places in some of our markets, in the chemicals side, the way Geoff has bought a bit of focus here to the way we define our business in the chemicals and then in the oil and gas area, hope you got a better clarity on that from Iain’s second presentation.
Then from Henry, Henry is the main at the coal face in China where a lot of this activity is going on and it’s the coal face two. There is no shortage of coal or anyone worried about that. I hope Henry would have addressed that issue.
And we’re incredibly well placed in China and it’s going to be an exciting place for us to be. Of course there will be periods where things slow down and then periods where they speed up again but I don’t think that’s anything that we ought to be too concerned about because the drivers are there for a very successful business and an increasingly successful business for us in China.
And then it was really great to hear Don’s review of just three months’ work with Johnson Matthey. So, he’s a very good addition to our team. We’re delighted to have him onboard and some of his insights are absolutely true.
One of the key things we can do is work out in a little react to that big, what a new catalyst will do in a 600 ton reactor out there in the real world, that’s a massive strength and one of the things that really attracts us to Davy when we first looked at it.
So there’s my kind of a quick summary. So exciting prospects going forward. And let’s throw it open to questions, questions on I’m sure what you have heard, what else you would like to know about PT, perhaps even other questions on the company if you would like and I will delegate those to the new Chief Executive who’s sitting in the front row here. So any further questions? Peter, in the front.
Peter Cartwright - Fiske
Peter Cartwright at Fiske. It’s a question for Don really, for the down hole stuff, because I must say I haven’t heard Halliburton say we didn’t get where we are today without the input from Johnson Matthey. So what is it you actually sell down the hole.
So what we provide and again as I tried to mention, actually we’re a very narrow player in this enormous market. So Halliburton and Company I mean, I heard a number the other day with this little consultant we’re working with, they spend $30 billion a year fracing in fracing costs a year. What we provide to about right now, it’s about 1% of the market, what we provide is tracing services. So we actually put tracers down hole into the frac fluid. When they frac a particular section, we’ll actually put the tracer down and we’ll put different tracers into different sections of the frac, right, so there’re different sections in the frac and then what you can start to see from that is which frac sections are actually delivering oil and gas because you detect it when it comes back to the surface. So that’s an area that is actually providing quite a lot of good insight. It’s very immature at the moment and not many people are actually using these sort of tracer services actually to improve their frac and their frac performance.
Peter Cartwright - Fiske
These are all metal chemicals…..
Specialty, specialty chemicals that our fine scientists and tracer co. have developed and are finding good usage for.
Peter Cartwright - Fiske
Actually once I’ve got the mic, I wonder if I could steal a question. Sorry about that. They’re not long questions. The first was maybe for Robert just on, with regards to what we’ve heard today, how we see the CapEx for the group evolving, given there’s clearly more investment going into PT, any guidance on that would be helpful. I’m just curious on the bio-based products, who are the customers that are emerging in that market for your catalyst going forward?
I’ll just sort of invent the answer, yes.
So the CapEx level I would say, we’ve said before, it’s going to average around 1.5 to 1.7 times. I think that’s still real, although we got 2 times here in this division. I think you heard last year, from what I thought quite a good presentation actually last year Martin, but you heard last year from John that his business will, the CapEx will start going down towards, I think he said 1 times last year but you know there’s a, we’re going to have a bit of a crossover here where you’re going to have a ramp up of CapEx in process technology and a gradual reduction of CapEx in ECT.
So blended over average 1.5ish and then as Geoff talked about, he talked about GTL opportunity, if we have GTL opportunity that comes, if it comes, as you’ve heard we believe the opportunity is there, then it will need a lumpy bit of CapEx to build a new plant to enable us to make the CapEx and so to make the sort of catalyst I should say. So if that were to happen then we might see drift off to 1.7 or something or whatever it might be, but thereabouts. Okay?
Unidentified company representative
From the customers in the buyer side, it’s a bit tricky to name names to be honest but they are -- I guess the startup companies in the U.S. particularly, somewhere elsewhere as well but they’re developing technology into this area. There’s a bag of them around. We mentioned Marion earlier because that’s one we can talk about. But that’s the kind of thing we’re doing where it’s either adjacent or we have particular catalyst skills that fit. Then those are the kind of companies that we’re working with.
Oh, the existing and -- then on we have the existing businesses where the NDA is main in the farm oil producers. We also have technology with Endecotts who is a biodiesel manufacturer based in the U.S. and then we deal most of the fat hardening and the odor chemicals industry as well.
Thanks very much. Two questions please, on the catalyst side, what percentage actually involved PGMs, and secondly on the flow sheet design side, is there ever any risk for JM or does the risk always get assigned to the client, basically when you are going from the mini plants up to the sort of full scale plants.
I’ll handle the first one. Iain will handle the second. The PGMs, PGMs part of our business is relatively small. It’s got to be under 10% of sales, maybe 5% of sales. So it’s really a narrow, narrow market where we sell.
And in terms of the risk side, you’re talking on the design side, I think there is risk but it’s relatively small. It’s certainly within the revenues that we actually receive. It’s generally our principle there. So the majority of the risk is not ours to take, clear indication we have a reputation risk. So we’ll go a little bit beyond, but generally it’s not huge, always not huge.
Anything else? Or is everyone thirsty? Okay, well, thanks again for coming. It’s been a pleasure to share some of the opportunities that we see going forward. And we’ll be around bit - my team will be around at dinner time, so look forward to chatting with you bit further.
Unidentified Company Representative
Obviously put hands together for the presenters today because I think they did a good job. And see you in some or all of you later. Thank you very much.