It was a vintage year for polyvinyl chloride.

The laws of supply and demand worked heavily to Georgia Gulf's favor in 2004. The Atlanta-based chemical maker supplies raw materials to other chemical companies and to manufacturers of plastic pipe, wood products, wire, fertilizer and other products. In its two main product segments — chlorovinyls and aromatics — supply was super-tight because manufacturers have kept a lid on adding capacity in recent years.

BEN GRAY/ Staff (ENLARGE)
Georgia Gulf CEO Ed Schmitt.
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Georgia Gulf was able to jack up prices for its products, enough to boost sales by more than 50 percent last year.

"There hasn't been any significant investment in chemical plants for the past six to 10 years, so demand finally began to equal supply," said Ed Schmitt, Georgia Gulf chairman and chief executive.

Supply was so tight, Schmitt said, that Georgia Gulf and its competitors were operating plants at more than 90 percent capacity. At that level, producers have pricing power that's hard to beat.

Customers, who use Georgia Gulf's chemicals to make commercial and consumer products ranging from vinyl siding to detergent, paid whatever it took to keep their plants running, Schmitt said.

Demand still growing

At the same time, demand surged in Georgia Gulf's largest and most profitable segment, chlorovinyls.

The star of the segment is polyvinyl chloride, or PVC. Georgia Gulf is North America's third-largest producer of PVC resin, and demand for the versatile material continues to grow as companies find new uses for it in the construction market.

PVC resin is used in a wide variety of commercial and residential construction applications, including windows, doors and pipes.

The company is benefiting from a run of new vinyl products used for fencing, decking and siding. In addition, municipalities across the country — including the city of Atlanta — are replacing aging water and sewer systems, creating demand for PVC pipe.

Every penny increase in the price per pound that Georgia Gulf charges customers for PVC resins can boost its per-share earning nearly 40 cents on an annual basis, according to the company.

Georgia Gulf's chemical portfolio also includes aromatic chemicals, such as phenol and acetone, used in products ranging from plywood to compact discs.

The company's profile has changed considerably since it took on a life of its own in 1984. It previously operated as the commodity chemicals division of wood-and-paper giant Georgia-Pacific, also based in Atlanta. Georgia-Pacific wanted to get out of the chemicals business to focus on forest products, so it spurred a management buyout, and a new company was born.

Named for Georgia headquarters and its plants situated near the Gulf Coast, Georgia Gulf went public two years later.

Although the ties between the two Atlanta companies have remained strong, Georgia-Pacific is no longer its biggest customer.

Helped by a 1999 acquisition that doubled the size of its chlorovinyls business, Georgia Gulf beefed up its customer roster. Among its largest are Owens Corning, Alcoa and General Electric.

Now that Georgia Gulf has gotten past a recessionary trough that threw its debt repayment off schedule, the company is considering another acquisition if the right deal comes along.

"We've been snooping around to see what we can do," Schmitt said.

The inevitable dip

In the meantime, get ready for the inevitable dip in the cycle that comes with any commodity business.

Georgia Gulf recently slashed its second-quarter profit forecast because of a glitch at its chlorine plant in Plaquemine, La. The company also blamed an expected decline in profits from aromatics, which are being hurt by lower selling prices.

"It's a temporary, one-quarter type of event," said Chief Financial Officer Jim Matthews. "The underlying fundamentals are still very good, and we're still optimistic about the business."

Some analysts have trimmed their outlooks, though, on broader industry concerns.

"Following several strong years, we believe pricing and margins for PVC, [Georgia Gulf's] main product, will begin to come under pressure in coming months due to weaker offshore demand, new Chinese capacity and falling spot prices," said JPMorgan analyst David Silver in a recent research report.

Yet the company's strengthened balance sheet — and a focus on penny-pinching — gives it a "reasonable risk/reward profile" as chemical companies go, Silver noted.

"[Georgia Gulf's] management and assets both have proven their mettle during the past cyclical downturn."