Eastman Chemical Company (EMN) announced yesterday that it has halted operations at the industrial gasification project in Beaumont, Texas, on high operational costs and other factors. In addition to high costs, Eastman attributed the move to a smaller spread between natural gas, oil and petroleum coke prices as well as continued uncertainty regarding U.S. energy and environmental policy.

Eastman expects to record non-cash charges of about $150 million to $180 million in the fourth quarter of 2009 due to the shutdown of the operations in the project. Yet, Eastman plans to continue to explore industrial gasification growth opportunities. Eastman has several projects involving coal gasification in development.

The company expects over time to increase its product volume derived from gasification-based raw materials to 50% from its current 20%. One of Eastman’s strategic plans is to strengthen its polyethylene terephthalate (PET) product lines. Recently, it has built 350,000 tons per year PET manufacturing facility based on its IntegRex technology in North America.

The company is also rationalizing 350,000 tons per year of its higher-cost PET capacity at its South Carolina, US, facility. Eastman makes chemicals, plastics and fibers used in products ranging from paint to furniture.

The company provides key differentiated coatings, adhesives and specialty plastics products, and is one of the world’s largest producers of PET polymers for packaging and a major supplier of cellulose acetate fibers. We believe Eastman has a solid foundation of businesses that will provide strong earnings, going forward. We maintain our Outperform recommendation on the stock.

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