Covestro’s competitor plant start-ups to put pressure on pricing – CEO
Jonathan Lopez
20-Feb-2017
COLOGNE, Germany (ICIS)–High selling prices for some of
Covestro’s key products in the fourth quarter are likely to
change once its competitors start up plants which have
suffered delays, the CEO of the German chemical major said on
Monday.
Patrick Thomas added Covestro’s own force
majeure declared on 6 October for methyl
di-p-phenylene isocyanate (MDI) and toluene
di-isocyanate (TDI), lifted at the end of the year, had
stopped the company from reaping higher benefits in the
fourth quarter.
Although sales dipped by 1.5% in 2016 to €11.9bn, net
income and earnings jumped compared to 2015 on the back of
higher selling volumes. Despite Covestro managing to sell at
higher prices in the fourth quarter, the average for the year
led to the slight fall in sales revenue, it said during the
company’s annual results conference.
“In the fourth quarter we saw prices going
up in polyurethanes (PU) because of tightness in the market
[although] we weren’t able to benefit from that due to our
own force majeure [on MDI] but globally that price increase
went through – and that was was because other people’s plants
did not start up on time and had problems,” said Thomas,
speaking at a press conference.
“That means later in this year, if everything
comes on stream when people declared, there will be a more
balanced market, so [we see] the second, third and fourth
quarter with slight caution. We don’t know when the plants
will start up – our friends down the river [Rhine, referring
to BASF’s Ludwigshafen site] have made a couple of comments
[so] that [TDI plant] will run at some stage.”
BASF said on 15 February that its
plant will come online “in the next few weeks”, prompting
some TDI sources to forecast a decrease in prices as the
large-scale 300,000 tonne/year plant would put a large
amount of product into the market.
Similarly, in 2016 Covestro benefited from the delayed start up at Saudi Sadara’s
isocyanates and polyols units, expected now in the second
half of 2017, against the previous expected start up date in
the first half. Sadara is a joint venture between the Saudi
national Aramco and US’ chemical major Dow
Chemical.
“A year ago we were facing a negative
outlook on MDI supply/demand balance but now these new
facilities [to come online] look now less significant,” said
Thomas.
“[We are seeing a] Strong first quarter
but [performance] for the rest of the year will depend on
what happens with competitors’ facilities.”
Although Covestro’s CEO mentioned
geopolitical uncertainties as a cause of concern for the
company, he said potential protectionist winds from the US
under the new administration would not be a problem for the
company thanks to its global footprint, a reasoning echoed by
other European chemical firms as they brace for potential
changes in global trade policies.
On 16 February, the CFO of Swiss chemical
firm Clariant said in an interview to ICIS the company’s
120 factories and research centres around the world would
protect it from protectionism.
“We are a net exporter from the US to
other countries – both within NAFTA [Mexico, US and Canada’s
free trade deal agreement] but also many other countries as
well. In the US, we are almost an American company [and there
is] little concern in terms of our business there, where we
get 22% of our total revenue,” said Thomas.
“If you flip to the other side, Mexico,
where we get 4% of our revenue, we are growing very well and
not only due to production of components exported at a later
stage, but thanks to the domestic markets like construction
and insulation, for instance.
“We are American in the US and Chinese in
China.”
Thomas was asked by a German journalist,
however, how committed the company is to its German
operations, especially those at Leverkusen, where Covestro is
headquartered and has major production sites.
“In Germany, we are from Leverkusen and
will continue to be. Leverkusen is our home.”
In general, Covestro’s management were
pleased with the 2016 financial results but more cautious
with their guidance for 2017.
Earlier in the day the company said
adjusted earnings before interest, taxes, depreciation
amortisation (EBITDA) will be “at or above” the 2016 levels,
but neither Thomas or the CFO Frank Lutz would put a figure
on it.
However, he said EBITDA in the first
quarter of this year will be “significantly higher” than that
posted in the first quarter of 2016.
Looking at demand at key markets for
2017, Covestro conceded the reduction in China’s tax
incentives to buy cars will affect the industry, which will
“grow at a slower pace”, while the construction industry is
expected to grow at a pace between 2% and 3% as the sector
recovers strongly in Europe and remains stable in the
US.
According to Covestro’s calculations,
those rates of growth in the construction industry would
translate into growth between 4% and 5% for insulation
materials, which at the same time would increase demand for
PU between 6% and 7%.
For both the electronics and furniture
industries, Covestro expects growth between 3% and 4% during
2017.
In what will probably be the biggest
chemical stock exchange placing in 2017, which according to analysts will see
Covestro’s parent company German chemical major Bayer
divesting its 64% stake at the firm, management would not
comment.
Bayer launched an initial public offering (IPO)
for 35% of Covestro’s stock in October 2015.
The company CFO said the “room for
manoeuvre” for potential acquisition was improving after the
balance sheet strengthened in 2016, but would not comment on
potential targets, or the size of a potential
acquisition.
“We don’t have a shopping list. We are open to
opportunities but in certain areas they can be limited due to
our market position,” said Lutz, with Thomas adding that in
many of the sectors Covestro operates in it would be
difficult to find bolt-on acquisition targets “without
[having] problems with antitrust” authorities.
While Covestro has been since June 2016
highlighting the start up of its CO2-to-chemicals plant
in Dormagen, Germany, to produce foams which can be used in
pieces of furniture like mattresses, the company recognised
it may need to step up its communication about the
product.
“The CO2 is not on the mattresses’
bubbles, but in the foam itself and will stay there forever,”
said Thomas, answering concerns from troubled customers who
hearing CO2 and mattress in the same sentence had rejected
buying the product.
The conservative guidance issued by Covestro took a hit on
the shares. Trading at €68.83 by 10:45 GMT, the
stock was 4.53% lower from the close on 17
February.
Pictured above: Leverkusen Chempark, where Covestro is
headquartered along with former parent Bayer
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