INSIGHT: Rubber rolls for Lanxess

13 August 2008 17:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Chemical companies exposed to the US housing construction and automobile markets are clearly feeling the squeeze and do not expect much relief anytime soon. And concerns are growing about the more volatile macro-economic environment.

Yet the momentum for growth in Asia-Pacific, Latin America and central and eastern Europe persists in many markets.

“The global chemical economy will continue to develop favourably supported by stimuli from the growth markets,” Germany-based Lanxess said on Wednesday, as it reported a strong second quarter and a good start to the third.

The synthetic rubber and performance chemicals producer sees some slowdown among the so-called BRIC (Brazil, Russia, India, China) nations. But it believes that it can continue to build on regional double-digit growth.

In the latest quarter, Lanxess managed to push up both volumes and price in synthetic rubber by 12%. It says the global rubber business is tight and its outlook for the business is strong.

Group-wide in second quarter pre-exceptionals earnings before interest, tax, depreciation and amortisation (EBITDA) were up 5.7% at €223m ($333m) on sales up 2.2% at €1.73bn.

The company has stuck with its full year earnings guidance despite the generally more uncertain outlook and the expected impact of higher raw material costs.

Lanxess is doing better than many might have expected because management has pushed ahead with significant restructuring and in recent quarters stuck to a price before volume strategy. That policy has paid off.

It faces raw material cost increases of between 15% and 20% in the third quarter compared with the 10-12% increase in the previous one, CFO Matthias Zachert said on Wednesday, but has already started to implement price increases.

Globally rubber is tight, Zachert suggests, and the Lanxess outlook for the business is positive for the rest of the year. In some products, such as inorganic pigments, it is bearing the full brunt of the US construction downturn. But it is compensating by pushing growth in markets elsewhere.

Lanxess believes that the global economy will continue to slow for the remainder of 2008 and that North America will deteriorate further. And it cannot but expect further energy and petrochemical raw material price volatility and further impact from the relative strength of the euro against other currencies.

Yet the portfolio changes, including the important sharpened focus on rubber and other businesses with the potential for growth can continue to produce dividends.

“The portfolio set-up is reflecting the changes we have made over the past three years,” Zachert told financial analysts. “The entire change of the business model is yielding results.

“Rubber continues to rock … and it continues to roll,” Zachert said revealing just some of his belief in the revamped Lanxess rubber businesses.

The company has a broad product portfolio ranging from leather chemicals through rubbers to pigments so the impact of slowing economic and industrial growth can be spread across different segments but rubber is king.

On the surface, Lanxess looks among the more exposed chemical companies but management has continued to restructure and cut costs. The company has also begun to grow, posting the first quarterly sales increase in six quarters of continue portfolio work.

The second-quarter results came in above analysts estimates and at first flush seemed to impress.

“We see these as yet another steady, reassuring set of numbers from Lanxess,” Credit Suisse said in a note to clients. “Most positive was the ability to achieve substantial price and volume increases in performance products,” its analyst remarked.

According to the bank, Lanxess once again delivered on what it said it would do and the outlook statement should again reassure the market.

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Author: Nigel Davis
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