INSIGHT: Solvay’s future shaped by company split, cost savings, and China expectations

LONDON (ICIS)–Solvay held to its initial 2023 guidance in second-quarter results, and while the outlook for general demand conditions remains poor, this is not the only factor which could change dynamics at the close of 2023.

• Split between two companies
• Cost savings to continue
• Confident on China for the mid-term

SPECIALTY VS ESSENTIAL
The most significant influence on the Belgium-based producer’s future will be how the division of its commodities business from its specialties portfolio unfolds.

So far, CEO Ilham Kadri has said the firm is on track to complete its spin-off, having officially started the operational separation between the two in July, preparing each entity for the stock market separation in December.

Kadri advised that this operational division was in some ways more important than what is to come later in the year, as setting best practices in place will make the transition to disparately listed companies smoother.

“Since the split there has been no major challenges. Now we are running the last miles, which are important ones,” said Kadri.

As part of this work, 300 people have been mobilised from various teams including IT and HR, emphasising the attraction for any potential new investors as both new companies are made of existing parts.

“The good news is we are not raising new money. We are not like an IPO, so we are shielded from turmoiled market conditions, be it debt or equity,” said Solvay CFO Karim Hajar.

Each new business will be facing different challenges depending on the downstream markets that they are serving. Hajar advised that the intention with both companies was to demonstrate resilience and the ability to rebound regardless of macroeconomic conditions in the long term.

COST SAVINGS
Since taking the helm in 2019, Kadri’s record on cost savings for Solvay has bee impressive. Initial commitments to save €300m were upgraded €500m which will be reached 18 months ahead of target.

This does not mean that Solvay is finished with the efficiency measures, especially ahead of the firm’s transformation and the challenges presented in the current economic climate.

“Any companies need to cut the bad costs and reinvest in the good costs, we continue to be frugal, we continue to look at our bad costs… it is now a part of our DNA,” said Kadri.

Solvay intends to do this by investing in manufacturing sites to unveil these inefficiencies and using digitalisation to implement best practices.

As for the costs created by losing synergies in line with the split Kadri advised that these are there to be washed away.

Although it is too early for mid-term company plans, new management structures will be able to advise on these upon their announcements.

For the European chemicals industry, energy costs have been a key concern since the Russian invasion of Ukraine, and the outlook heading into the second half of 2023 indicates supply – and therefore prices – could tighten further.

Solvay anticipates some positive impact in future quarters as a lagging effect, in response to the decline from higher costs in line with peak inflation last year.

The second quarter was the first in two years where energy and raw materials price dynamics were positive for the company, due in part to its multi-year hedging strategy across various energy sectors based on the producer’s exposure.

One cost that is unique to Solvay is its US settlement on polyfluroalkyl substances (PFAS) which translated to a €229m provision in the second quarter, set up as a remedial funding source for regional environmental protection.

The €229m provision is an estimated expense and does not include expected recoveries from third party contributors or potential insurance proceeds which could significantly reduce Solvay’s costs.

While PFAS have become undesirable in the public eye due to its ‘forever chemical’ status, they are also key materials needed for sustainable solutions, in the production of batteries, semiconductors, and green hydrogen.

Solvay is taking a double-pronged approach by exiting production while also looking at innovation and finding a way of degrading persistent PFAS in the environment while continuing in its drive towards zero technical emissions from its manufacturing facilities.

BEYOND EUROPE
One key reason that many European producers had to revise expectations was due to a weaker than anticipated recovery in China following the easing of zero-COVID restrictions at the beginning of the year.

While trade from China appears worse than previously forecast, this could continue to weigh heavily on Europe’s chemicals industry as competitive imports seek buyers in other regions.

“Some people were betting on China recovering earlier in the year and this has failed to materialise, post first quarter. We don’t have a crystal ball but we did not bet on China recovering,” said Kadri.

Demand from EV batteries in China was a weak spot for Solvay, but the firm remained insulated from worse effects due to its exposure evenly split between Europe, the US and Asia – which also minimises risk for investors.

Solvay is continuing to invest in China, and Kadri confirmed that the company is satisfied with its footprint in the country, citing opportunities for the firm from the Chinese 2060 carbon neutrality roadmap.

“I remain positive on the midterm about China, it is an important market to us,” she added.

By Morgan Condon

Thumbnail picture: Solvay’s plant in Bernburg, Germany (Source: Solvay)