Eastman Chemical (NYSE: EMN) converts basic chemicals into useful compounds and materials. With $5.0 billion in sales in 2009, the company is very small compared to its two nearest rivals, Dow Chemical Company (DOW) and DuPont (DD).[1]

Eastman Chemical Company is a global chemical company which manufactures and sells a broad portfolio of chemicals, plastics, and fibers. Eastman Chemical Company began business in 1920 providing chemicals for Eastman Kodak Company's photographic business and became a public company, incorporated in Delaware, as of December 31, 1993. Eastman does its manufacturing in 16 sites in 9 countries that supply chemicals, plastics, and fibers products to customers throughout the world.


Eastman's headquarters and largest manufacturing site are located in Kingsport, Tennessee. Eastman sells its products to the food, pharmaceutical, and construction industries. It breaks its products and operations are managed and reported in five operating segments: the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment, the Fibers segment, the Performance Chemicals and Intermediates ("PCI") segment, the Performance Polymers segment and the Specialty Plastics segment.

Financial Discussion

In 2009, Eastman's total sales were $5.0 billion, and it had an operating income of $317 million.[2] This allowed Eastman to to post a net income of $136 million.

Sales revenue for 2009 was significantly lower than it was in 2008, as total sales declined $1.7 billion.[3] The company attributed this 20 percent decrease in sales revenue to lower selling prices as well as lower sales volume primarily attributed to weakened demand due to the global recession.

Operating Segments

Eastman’s production is divided into five segments: Coatings, Adhesives, Specialty Polymers, and Inks (CASPI); Fibers; Performance Chemicals and Intermediates (PCI); Performance Polymers; and Specialty Plastics (SP). The CASPI division is more cyclical than Eastman’s other segments since it sells to the construction, automotive, and heavy manufacturing industries. During market downturns, less cyclical divisions such as Fibers or Specialty Plastics stabilize Eastman’s net sales.

Coatings, Adhesives, Specialty Polymers, and Inks (CASPI) (24% of 2009 Revenues)

In its CASPI division, Eastman manufactures chemicals for use in paints, coatings, inks, and adhesives. Eastman makes these products using proprietary chemical processes that lets it maintain 15-20% profit margins. This segment caters largely to the construction, automotive, and heavy manufacturing industries, so its performance is more cyclical than Eastman’s other divisions. As the construction and automotive industries are demanding less raw materials from CASPI due to their stagnation since October, 2008, this segment’s growth is threatened. [4]

Fibers (21% of 2009 Revenues)

Eastman Chemical’s Fibers segment caters mostly to the tobacco, clothing, and furniture industries. Eastman is the world’s second largest manufacturer of acetate tow fiber, which is used as an additive in cigarette filters. Since the tobacco industry’s approximate 2% annual growth in Asia and Eastern Europe is generating demand for cigarette filters, Eastman’s management expects this segment to grow as well in the foreseeable future.[5] The Fibers segment is arguably Eastman’s most stable and promising, and its relatively high 24% operating margin encourages Eastman to continue investing in it.

Performance Chemicals and Intermediates – PCI (26% of 2009 Revenues)

The PCI segment produces commonplace and unique chemicals for the pharmaceutical, foods, and agricultural industries. It has a low 10.5% operating margin despite Eastman’s efforts to optimize its processes, and its price level depends on a volatile market equilibrium.

Performance Polymers (14% of 2009 Revenues)

The Performance Polymers division produces Polyethylene Terephthalate (PET) for use in packages, bottles, and other liquid containers. Profit margins in this division have declined rapidly as more and more competitors enter the market and oversupply the industry. To combat declining margins in PET production, Eastman has divested approximately 55% of its PET capacity, and it is also optimizing its remaining PET production using proprietary IntegRex technology. Eastman is scaling back its Performance Polymer production in order to boost its company wide profit margin and rid itself of the line’s volatility.

Specialty Plastics (SP) (15% of 2009 Revenue)

The SP segment produces copolyesters, cellulose derivatives, and plastics for packaging, LCDs, durable plastic goods, and tapes. This division has had stable sales and price levels over the past five years, and Eastman plans to marginally increase SP production as the segment grows on par with the general economy.

Trends and Forces

Increasing Cost of Raw Materials Limits Profit Margin

One of Eastman's major sources of costs is related to purchasing raw materials, which mostly include small organic molecules such as ethylene glycol or paraxylene. Since the Company purchases approximately 80% of its inputs from outside sources, its profitability depends on the market price of those raw materials. In the event of a relatively frequent 1% market price increase of Eastman’s raw materials, the Company’s total costs increase in an approximate 7:10 ratio to the mentioned price change, and its profit margin decreases at a similar 7:10 ratio as well. In order to protect itself from price fluctuations, Eastman purchases most of its inputs through 3-5 year contracts and occasionally engages in derivative hedging. As a result of such long term contracts, Eastman insulates itself from most month to month and even single year price fluctuations, and can afford to worry only about long term price changes.

Eastman is Subject to Competitive Market Prices

As a maker of commoditized chemical products, Eastman conforms its price levels to its industry’s low market equilibrium. In response to permanent price depressions for specific products, Eastman normally drastically lowers its production of the depreciating product and converts the unused factories’ capacity to produce higher margin goods.[6] Whether Eastman can quickly and smoothly switch operations will impact its earnings in the future.

Competition & Market Share

Eastman Chemical competes with much larger firms across its five business segments. Eastman’s profit margin is on the low end of the single-digit average of the chemical industry. This competitive disadvantage is encouraging Eastman to switch to coal-based production technology and convert its existing operations to higher-margin processes.

  • E.I. du Pont de Nemours & Company (DD): Beyond competing with Eastman in all its operating segments, EI du Pont also makes bioengineered seeds for agricultural uses. It has a very large global presence, with 60% of its net sales originating outside of the United States. [7]
  • Dow Chemical Company (DOW): Dow has pursued a high volume, low margin strategy in its operations by making products in its Hydrocarbon and Silicon Rubber segments. It also has entirely nonchemical operations such as its insurance wing.
  • BASF SE (BASFY): Based in Germany, this company operates on a much larger scale than Eastman in all of its five divisions. It is also involved in the oil exploration and nutrition industries.
  • Huntsman (HUN): With sales only ~50% larger than Eastman’s, Huntsman specializes in the production of polyurethanes, which are used extensively in the construction industry.


  1. EMN 10-K 2009 Item 1 Pg. 5
  2. EMN 10-K 2009 Item 6 Pg. 30
  3. EMN 10-K 2009 Item 7 Pg. 39
  4. “Construction industry drying up, and not just in the desert,” 12/11/2008
  5. [http://www.alternet.org/healthwellness/64222/, “The World’s Growing Number of Smokers,” 10/4/2007
  6. Yahoo Finance, “Eastman Completes Acetate Tow Expansion at Workingston Site,” 10/30/2008
  7. E.I. du Pont de Nemours & Company (DD)
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