Elementis at last looking chromium-plated

A decade ago, Elementis made chromium salts in an aging factory in Country Durham - a dirty, unsophisticated business that was already struggling to cope with Asian competition. It shut that plant in 2008 as part of a major reinvention and is now looking better-positioned and more profitable. Best of all, the stock market hasn't yet sniffed out the changes and the shares are rated as if Elementis remained a smelly industrial conglomerate.

These days Elementis makes over three-quarters of its profits from additives to paints and other chemical-based products to improve their texture and flow - a science called rheology. It's a lucrative business that generated profit margins of 17 per cent in the first half of 2010. That's because it is sheltered from mainstream pricing pressures - paint-makers need rheological additives yet their cost is only a small proportion of the total cost of the paint.

The other reason Elementis can keep prices high is that it owns the world's major hectorite mine, in northern California. Hectorite is a vital ingredient in high-end rheological additives for premium applications, such as cosmetics and specialised industrial coatings. A substitute called bentonite, which is widely available, can be used for run-of-the-mill paints, but these only account for about a quarter of divisional sales.

The growth outlook is promising, too. Since its 2008 acquisition of Deuchem, a sizable resin and additives maker based in the far east, Elementis has had a strong foothold in China. Not only is demand for coatings rocketing there, but with the government's urbanisation programme industrial consumers are also becoming pickier about the quality of paint they use, which often depends on specialised additives. This is a double boost for the group.

But the strongest region in the first half for Elementis's rheology business was North America, mainly because its products are used in the horizontal extraction of gas from shale fields. US efforts to secure its energy supply, combined with the BP fiasco in the Gulf of Mexico, has boosted demand for horizontal extraction - and it requires up to 10 times more chemicals than vertical drilling, albeit only bentonite-based ones. Volumes were up 113 per cent in the first half in this particular area, admittedly aided by a recovery as clients restocked.

Elementis has not abandoned its chromium business completely. It still has a factory in the US, which now looks like a vital asset. It's the only chromium plant in the country, with annual output of about 100,000 tonnes, supplying around two-thirds of US demand for chrome-plated car parts, timber treatment, leather tanning and other uses. Because chromium is so noxious, it's expensive to transport - so the green-conscious Obama administration is highly unlikely to approve the construction of other chromium factories. That gives Elementis a huge pricing advantage - its profit margin hit 15 per cent in the first half.

Profits have been hampered by write-downs and other exceptional provisions for more than a decade, as Elementis has transformed itself. But that process is now largely complete, with only the small and low-margin business in surfactants (another spreading agent) remaining without any obvious purpose. Elementis also paid a fine in February relating to a heat stabiliser manufacturer it part owned 12 years ago, which will hit full-year results.