INSIGHT: LANXESS CEO ‘Lehman 2’ warning highlights extreme and broadening demand weakness

NEW YORK (ICIS)–A huge earnings warning by Germany-based specialty chemicals company LANXESS highlights the extreme and extended weakness in European and global construction and electronics markets, along with surprising declines in “usually stable” consumer applications.

The weakness in housing/building and construction and consumer durables cited by chemical companies in their profit warnings appears to be broadening out to other sectors.

“Nearly all industry markets are impacted by weak demand and destocking… This feels like Lehman [Brothers] 2, and we clearly see that even markets that normally tend to be very stable and close to the consumer… are impacted,” said LANXESS CEO Matthias Zachert on an ad hoc investor call.

“We see a volume decline which is steeper compared to the March/April 2020 pandemic crisis and even see a steeper volume decline compared to Lehman because it’s lasting longer,” he added, pointing out that destocking has been ongoing since November 2022. The extent of the volume decline was not disclosed.

The collapse of US-based investment bank Lehman Brothers in September 2008 kicked off the worst phase of the Great Financial Crisis of 2008-2009.

The latest profit warning by LANXESS, along with US-based chlor-alkali producer Olin, adds to a growing list of downside revisions, including from US-based Dow, LyondellBasell and Cabot.

LANXESS announced Q2 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) are now expected to come in around €100m, well below prior expectations of roughly on par with the €189m in Q1.

Guidance for the full year has also been ratcheted down to a range of €600-650m, assuming no pick-up in demand in Q3 and Q4, versus prior estimates of €850-950m. There are no signs of a recovery thus far in June, the CEO said.

“The current demand situation is abnormal, and it’s very pronounced,” said Zachert.

Shares of LANXESS plunged on 20 June by 15% to €26.67, a level not seen since February 2010.

BIG DECLINES IN CONSTRUCTION, ELECTRONICS
“Construction and electronics industries show substantial decline, and this is not only true for Europe but also for Asia,” said Zachert, who also noted that agro markets are also weakening in Q2.

“From the end industry perspective, volumes are brutally down,” he said, adding that destocking continues amid soft worldwide demand.

LANXESS produces biocides and inorganic pigments for the construction and coatings sectors, along with other end markets.

By segment, the company is seeing the greatest volume weakness in advanced intermediates (industrial intermediates, inorganic pigments) and specialty additives (polymer additives, lubricant additives, rubber chemicals), the CEO said.

The dire demand outlook echoes recent comments from an executive with a major global polymers and chemicals distributor indicating that Q2 volumes are down around 25% from last year and that Q3 order books “look terrible”.

OLIN PROFIT WARNING ON VCM TURNAROUND
Olin also announced a profit warning for Q2 with lower-than-expected EBITDA in the $350-360m range, mainly attributed to a $50m impact from an extended turnaround at a vinyl chloride monomer (VCM) plant in Freeport, Texas.

The revised Q2 range compares to Q1 levels of $434m and Wall Street consensus of $417m, noted Fermium Research analysts Frank Mitsch and Aziza Gazieva.

In epoxy resins, Olin will cease operations at its Gumi, South Korea, facility, reduce epoxy resins and upstream capacity at its Freeport, Texas, site and cut sales and support staff across Asia.

“The changes in Epoxy are partly a recognition of the 600,000 tonnes/year of base LER (liquid epoxy resins) capacity added in China over the past 18 months,” said the Fermium analysts.

Olin CEO Scott Sutton cited a “challenging demand environment” for both its chemical businesses (chlor-alkali and epoxy resins).

Shares of Olin fell 6.6% on 20 June with weakness seen across much of the chemical sector.

US HOUSING OUTLIER
Even as chemical companies have warned on weakness in the housing/building and construction sector, one outlier is today’s release on US housing starts which showed an unexpected 21.7% spike in May to a 1.63m seasonally adjusted annual pace. This was up 5.7% year on year and well above economists’ consensus estimates of 1.33m for 2023.

Housing is a key end market for chemicals in the form of paints, wire insulation, house-wrap, sealants, roofing materials, resilient flooring and vinyl pipes and siding. New housing also generates sales of appliances, furniture, carpet, fixtures and window treatments.

In total, each start represents on average over $13,000 in chemicals value, according to Kevin Swift, ICIS senior economist for global chemicals.

Insight article by Joseph Chang