INSIGHT: Bayer MaterialScience will optimise global footprint

04 March 2013 17:24  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Chemical companies are seeing stronger business in China following the Lunar New Year holidays, and - despite some understandably deep concerns about future rates of growth - appear to be fairly positive regarding the 2013 outlook.

Downstream players such as Belgium’s Solvay have said that there are signs that China markets are growing again. Bayer MaterialScience CEO Patrick Thomas told financial analysts last week that demand for its products in certain applications was picking up after the holidays.

“We saw the usual slowdown around the Lunar New Year, but we're pretty confident looking forward,” Thomas said. “Now that there is some semblance of stability in the government, we're seeing the stimulus programmes kicking back into the food chain,” he added. That supports the Bayer MaterialScience polyurethanes business in refrigeration applications from domestic appliances through to refrigerated lorries.

“There's been a boost in the infrastructure restarts on some several of the projects which were stopped during last year's uncertainty,” Thomas said referring to the political and economic uncertainty surrounding the once-a-decade leadership handover in China last year.

A third reason for Bayer MaterialScience’s confidence in China rests with the automobile industry - the hope that it will start to pick up again and that there will be more growth in the sector.

The company has struggled somewhat this past year and faced margin pressure in markets which have not grown to match global capacity additions. Its cash flow return on investment (CFROI) in 2012 was 5.6%, 1.5 percentage points below its cost of capital, the company said. It is adding new production capacities to help keep up with fierce competition and to help drive production costs down. 

“We are cautiously optimistic for our MaterialScience business in 2013 and are focusing on improving our capital returns in the mid-term,” Bayer said. “We based our 2013 budget on a modest global GDP growth driven by the ongoing recovery in the US and robust development in the emerging markets. The European economy is expected to remain weak.”

The potential for growth in the polyurethane and polycarbonate markets has always been attractive to Bayer; but the cyclicality of the Bayer MaterialScience businesses less so.

The much larger polyurethanes business generated sales growth of 11% year on year in the fourth quarter of 2012 and 12% growth to €6.00bn ($7.79bn) for the full year.

The smaller polycarbonate operations produced only flat sales in the fourth quarter and saw sales decline by 2% to €2.82bn in 2012.

Bayer MaterialScience full year 2012 earnings before interest, tax, depreciation and amortisation (EBITDA) were up 7% at €1.25bn before special items.

Bayer said its sees a “positive development” in 2013 for all its key MaterialScience customer groups and that it is planning for a slight increase in sales (on a currency adjusted basis) for MaterialScience this year to around €12bn. Sales were up 3% on that basis (6% as reported) last year, with volumes up 2%, at €11.5bn.

First quarter 2013 sales are likely to have edged up compared with the fourth quarter of 2012 on the same basis but Bayer said that EBITDA before special items will be hit by higher feedstock costs and the overrun of maintenance at the company’s production site at Baytown  in the US.

“We expect that by 2015 we will again be in a position to earn a premium over cost of capital,” Bayer said, although Thomas admitted that 2013 is likely to be a “transition” year. The outlook is based on an improving global supply/demand balance - in other words, only limited capacity additions over the next three years - a new efficiency drive and plant optimisation in Germany. The cost reduction programme is expected to improve margins in MaterialScience by 150 basis points through 2015.

Thomas said that Bayer MaterialScience has more than 100 different measures in its plan to raise efficiencies and that they cover most parts of the value chain. The company is looking at the consolidation of some of its smaller manufacturing sites where market development has been achieved for instance. In other words, fixed cost reductions. It is also going to cluster some countries into regional platforms.

The regional reorganisation should lead to improved logistics and hence, further efficiency improvements.

As Thomas said, Bayer Material Science has invested heavily in chain over the past four to five years and continued spending on those projects through the recession. “Now we have to grow into the suit that we have cut the cloth for and that becomes our challenge.”

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214

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