INSIGHT: Clariant portfolio transformation complete for now, hopes remain for H2 demand bump

LONDON (ICIS)–Clariant has completed the rebalancing of its portfolio carried out over the last few years according to CEO Conrad Keijzer, while the Switzerland-based company continues to hope for a recovery in products and durable goods demand in the second half of the year.

Following the sale of its masterbatches and healthcare packaging businesses, the company announced in November 2020 plans to further optimise its specialty chemicals portfolio and cut headcount by around 1,000 positions.

The portfolio transformation plan gained paced in recent months with the announcement in August 2022 of the sale of its Quats business, which produces quarternary ammonium compounds used in the production of preservatives and surfactants, to Global Amines Company, a 50/50 joint venture between itself and Wilmar.

This was followed in April with the close of the sale of its North American oilfield services business to Dorf Ketal for $14.5m. The Quats sale, priced at $113m, is also expected to close in the first half of this year.

Late 2022 also saw the completion of Clariant’s purchase of BASF’s US attapulgite mining and production business, used in the purification of edible oils and renewable fuels, which was folded into the company’s functional materials business as part of its natural resources offering.

The consolidation of the attapulgite business into its operations added 1% to first-quarter sales year on year, helping alongside a 7% positive pricing uplift to offset a 7% decrease in volumes over the same period.

Clariant also expects to book proceeds from the two divestments this year, although sales are projected to be slightly down overall in 2023, at Swiss francs (Swfr) 5bn compared to Swfr5.2bn in 2022, as a result of the recessionary first-half environment compared to a strong H1 last year.

MAINTAINING SPECIALISMS
At this point, Clariant is largely finished with its portfolio realignment, according to Keijzer, although the focus on specialties dictates vigilance on broader production trends and the danger of some chemicals becoming more commoditised over time.

“What is important is to continue to innovate, which we’re doing, but some segments simply do commoditise. Right now, that’s not the case, we have a true specialty portfolio, but you need to continue to look at it,” he said.

“You cannot sit on your laurels, but right now we’re happy with the portfolio. We invest in innovation, we make sure that the specialty businesses we have stay specialty, and we don’t see any special announcements or divestments in the near future,” he added.

The company is reporting an easing in the destocking headwinds that have dogged the global chemicals sector through the year so far, but the effect was tangible on group performance in the first quarter.

Clariant’s catalysts business proved resilient during the period with sales firming slightly year on year, while care chemicals and absorbents and additivies volumes fell at low to mid single digit levels over the same period. Group earnings before interest, taxes, depreciation and amortisation (EBITDA) fell 24% year on year during the quarter, while margins shrank to 13.9% from 17.4% during the same period in 2022.

The intensity of destocking headwinds have started to ease in Europe, although the US is further behind in that process according to Keijzer, while China continues slow in line with the pace of easing social controls.

“The destock is really behind us in Europe now,” he said. “In the US there is still some way to go in the second quarter, but this is definitely a big positive for the second half.”

The question hanging over the sector is the pace of that demand uptick, with many players reporting improving conditions in the second quarter, but at a slower pace than had been hoped for earlier in the year.

DEMAND RECOVERY
The European economy at present is marked by a decoupling between service and manufacturing sector performance, with industrial production remaining recessionary as consumers in a difficult cost environment prioritise travel and recreation over goods.

“Out of [the pandemic], people spend their money on travel and hotels or airlines. That’s all very good, but it’s not actually where our products are going in these segments, so there is rebalancing back to products and durable goods which needs to happen,” Keijzer said.

Raw materials remained up year on yearinI the first quarter but fell sequentially, dropping 4% for the ethylene, propylene and derivatives that make up the company’s key feedstock spending, with expectations in-house that the trend will continue through the year.

The resilience of European gas reserves is also a positive sign for energy pricing through the year, Keijzer added.

“I think all in all we have a much better picture on raw materials and on energy than we saw a few quarters ago. Our outlook for the year is continued easing and we in our internal forecasts are now looking at the mid-single digit year on year declines for raw materials,” he said.

BIOFUELS
One newer production asset that is proving more difficult to gauge short-term performance for is Clariant’s second-generation cellulosic ethanol plant in Podari, Romania.

The company announced the first batches successfully produced at the plant in June last year, but scaling up has proven more complicated.

The second-generation bioethanol production technology utilises agricultural waste, meaning that the initial raw materials have a much lower sugar content than materials used in first-generation bioethanol production plants.

The Podari plant uses enzyme technology first to convert the materials to a higher sugar content, then convert them into alcohol, keeping the process clear of EU prohibitions of using crops for biofuels production that could have been used elsewhere.

Development of the Romania production plant follows construction of a pre-commercial facility in Germany for the fuel, known as sunliquid.

Ramping up at the larger plant has proven more difficult than expected, with the company announcing a Swfr225m impairment on the unit in December 2022, citing below-target yields. A further Swfr 13m was booked in the first quarter.

The key underlying issue is variation in crop yields in Romania compared to Germany, according to Keijzer, requiring the development of new enzymes.

“We’re working on getting yields better by coming up with new cocktails, new mixes of enzymes, but it does take some time to actually develop… these are microorganisms that you need to grow, and they don’t grow as fast as we sometimes like them to,” he said.

“As long as we continue to make the progress that we are hoping and expecting to make there wouldn’t be a need for further impairment at this point,” added CFO Bill Collins.

HYDROGEN
There is also the question of future low-carbon energy competitiveness. Speaking at the annual GPCA forum in Riyadh, Saudi Arabia, last year, Keijzer was bearish on Europe’s prospects for green hydrogen compared to other regions, particularly Australia and the Middle East.

“If you look at Europe right now, there are lots of announcements from green hydrogen players, but without subsidies, most of these are not very competitive,” he said at the time.

European Commission policymakers have moved to respond this year to the gauntlet thrown down by the US Inflation Reduction Act (IRA) with sweeteners added to the Green Deal and moves to develop a hydrogen bank.

These moves are “necessary”, Keijzer said, but more may be needed to provide as enticing an investment climate as the US has developed.

“I Just hope that [the EU response] is going to be simple, actionable and pragmatic, like the IRA package in the US. We see already a big drop in investment to Europe,” Keijzer said, noting that the combined capital and operating expenditure subsidies can add up to an 85% subsidy for a new green hydrogen plant in the US.

I’m still fairly critical on the competitiveness of Europe on green hydrogen,” he added.

Insight article by Tom Brown.