Covestro’s competitor plant start-ups to put pressure on pricing - CEO

Author: Jonathan Lopez


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