Message from the Chairman

Dear fellow shareholders,

As Chairman of the Board of Mexichem, I have three main jobs: to ensure that your company has the best management team possible; to define  a strategy—in partnership with management and the board—that will deliver value to you over the long term; and to implement world class corporate governance practices that will safeguard your  investments.

In that spirit, this letter will focus on the evolution of our strategy in an increasingly complicated global scenario and on key changes in corporate governance. I am confident that, in Antonio and his team, we have the management we need for Mexichem to successfully execute the strategy we have agreed upon. His letter will detail our strong 2015 performance, our investment plans and priorities, and our expectations for 2016.

Our strategy

In Roman mythology, Janus was worshipped as the god of beginnings (which is why our calendar begins with a month called January) as well as of transitions. He was typically depicted with two faces, looking in opposite directions. In a way, that image applies to Mexichem, since we are now at a transition point in our evolution from a company producing commodity products to an integrated, global producer investing in and operating across our industry’s value chain in markets around the world.

vinyl
The essence of our Vinyl business strategy is simple: transforming cheap, plentiful natural gas liquids into plastics, mainly in North America, and then producing and distributing value added products worldwide throughout the world.

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Over the last several years, we have invested heavily in building this platform. By 2017 Mexichem will be partially integrated across the Vinyl business group, from ethane and salt to transformed products, mainly pipes and fittings.

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The key to the transition will be the completion of our Ingleside, Texas cracker joint venture with OxyChem. The impact is captured in the chart below, which shows accumulated capacity in all the plants in the world (horizontal axis)  against the cost per metric ton of production of each plant (vertical axis). Today, our plants are primarily at the mid-range in terms of cost. Once the cracker is operating, however, our plants will be more competitive than 80% of our peers (as shown in the movement downward and to the left in the graph). That low-cost position should allow us to improve utilization rates for several years, since high barriers to entry and industry consolidation are likely to discourage major new investments by our competitors.

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Fluor
The strategy for our Fluor Business Group is similar to that of our Vinyl Business Goup. In this case, we are already uniquely positioned as the world’s best integrated producer. We have more fluorspar reserves, with the lowest extraction costs. In the downstream business, our fluorocarbons in North America Europe and Asia have been affected by Chinese imports and further integration will be tougher. But we are optimistic that our upstream advantages will eventually allow us to complete the value chain. In the short term, we are also very optimistic about the potential of fluoro compounds in industries like cement.

Fluent
Through Fluent, we have built a global platform with local leaders who can access millions of clients in more than 30 countries. Combined with our strong position  in Vinyl and Fluor, we are uniquely positioned to manage the ebb and flow of demand across economic cycles, create sales synergies between business  units, and innovate and expand our portfolio of products where it makes sense. Also, as the map below shows, there is exiting potential in Asia and  Africa.

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In short, I believe  we  are  positioning  Mexichem  for a sustained period of growth and profitability. However, in today’s world of constant change, even the best strategy must be closely monitored and adapted to changing realities. We are  obsessed with staying competitive and client-focused and generating as much cash flow as possible to take advantage of organic and non-organic opportunities. This means we cannot afford complacency—even when our results are good, and our balance sheet strong and our outlook even better.

The challenges and opportunities come from many directions. As we have recently seen, structural changes in demand and supply dynamics can alter raw material prices radically and  unpredictably. New mines may be discovered and developed, while technological advances can produce new materials and products. Technology is a two-edged sword: even as we harness it to make our own processes more efficient and innovative through tools like e-learning, e-marketing and others, cyber-security looms as a real and growing threat to the integrity of our business.

Moreover, shifting geopolitics can create opportunities or threats. For example, China, a still emerging superpower, will inevitably alter the course of global markets, for better or for worse.

Closer to home, North America offers an almost unique combination of higher growth and lower risk in the foreseeable future; indeed, that is why we are in the process of investing more than $1.2 billion between 2013 and 2017 in various projects in Mexico and the United States. However, both countries also face challenges arising from growing populism, economic disparities and pressing infrastructure shortages that could sap their potential.

Frankly, I do not believe we will discover a “new normal.”  Perhaps the best we can hope for is a “new abnormal”—and to recognize that coping with turbulence will be our permanent  challenge.

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Corporate governance

With the recommendation of Mexichem´s audit and corporate practices committee, your board has approved significant changes to our governance structure. At our upcoming shareholders’ meeting I will propose the following:

  • Downsizing the board from 16 directors and 9 alternate directors to 11 directors and no alternates;
  • Assuring that at least five board members are independent;
  • Adding a tax and finance committee to the existing audit and corporate practices committees; and
  • Charging the Corporate Practices Committee with finding the best possible directors and to ensure that the board includes women as well as

These changes  are  designed  to  make  the board’s work more efficient, to increase directors’ engagement with the company, and to ensure that the board continually evolves alongside  Mexichem.

Of course, Mexichem would not be where it is today without the extraordinary dedication and wise advice of the directors and alternates who have served our company over the past fourteen years.

Thank you, on behalf of all your fellow shareholders.

I also want to recognize and thank our employees for their ongoing commitment, leadership and loyalty. It is their values, capabilities, and experience that will allow us to realize the great potential that lies ahead.

Finally, I began this letter discussing the ongoing evolution of our strategy and our company. We are  at a turning point. Although many of the key pieces are now in place, this transformation will only be fully realized only over the next fifteen years. However, like Janus, I think all of us—directors, management, employees, shareholders and other stakeholders— can  now  look  forward  to  a  robust  and   profitable future.

firma JP

Juan Pablo del Valle

Chairman of the Board of Directors