LANXESS sticks to strategy in face of coronavirus outbreak - CEO

Author: Tom Brown

2020/03/26

LONDON (ICIS)--LANXESS intends to stick to its strategy of organic growth, increasing its focus on consumer protection chemicals and developing battery technology operations in the face of disruption from the coronavirus outbreak, according to the CEO of the Germany-headquartered firm.

The impact of the outbreak is likely to be substantial across much of the economy, but represents a one-off event, with the focus on remaining resilient and continuing to implement measures in the meantime, according to LANXESS CEO Mathias Zachert.

“People are travelling less, big events are being cancelled, logistics will [be disrupted],” he said.

“This will have an impact but it will not be an underlying event, it will be a one-off, and once corona is through the region, of course there will be a catch-up and therefore I think the most important thing is that you remain focused, you remain calm, and get your measures implemented,” he added.

IMPACT
The company has guided for a €50m-100m in earnings for the year as a result of the outbreak, which was regarded in Europe as a primarily Asia Pacific issue until the rapid spread of cases in Italy sparked a series of movement restriction and non-essential business shutdowns across the EU.

The estimate was given on 11 March, but the company continues to maintain that projection at present, according to a company spokesperson.

“There have been no changes to our estimates on the Covid-19 impact for 2020. Operationally, our plants are running with a few exceptions due to local shutdowns (Italy, India, Argentina),” the spokesperson said.

“Nevertheless we are monitoring the developments very closely and will be ready to act where needed. Currently, we are further increasing cost discipline and analysing where planned projects and investments can be postponed,” he added.

Some other European chemicals firms are already starting to rethink their expectations for the year.

Austria-based fibres producer Lenzing issued guidance of lower earnings for 2020 on 12 March, and threw out that forecast this week, citing a likely far sharper fall than previously thought due to plummeting retail demand.

LANXESS’ current model is based on how coronavirus moved through the economy in China, with the institution of a mandatory quarantine period, significant logistics disruption, and a shutdown of much of the economy, before a gradual rebound as controls were loosened.

Controls in Europe have been less rigorous and the patterns of the spread of the virus could differ from those seen in Asia, with case numbers in Italy and Spain both set to exceed levels seen in China so far.

LANXESS’ projections are based on a two-to-three month period of disruption in Europe followed by a rebound in demand as demand patterns normalise, but a more dramatic system shock or mass industrial shutdown would have a much more dramatic impact, according to Zachert.

“If we have a collapse in the economy, the numbers will look different,” he said.

“If you look at the current situation in China, production is increasing again, so we take the assumption now that Europe will be infected and take around two to three months to come out of it again.

“We are not factoring major plants are standing still for weeks in our guidance, that would be a different scenario,” he added.

SUPPLY CHAIN DISRUPTION
Production in China is ramping back up after falls of 80% for passenger car demand in February and substantial falls for retail sector consumption, but that brings its own challenges for supply chains that are still getting back to normal operations.

Many players across industries will have been left with low inventories, meaning demand is higher than usual when capacity is lower in many cases, Zachert said.

The company is estimating that it will be unable to deliver 5% of its products during the China recovery period, expected to run through Aprill

“At the beginning of February, the production restart after Chinese New Year was delayed, so you had a situation where stocks did not come in and stocks did not go out. So when production restarted then current inventories were used up, but now everybody wants to replenish inventories in March,” he said.

“The demand loads that you currently have on the logistics side are pretty intense right now, and therefore capacities are short. Not everybody will get the capacities on trucks or ship container that they want to have,” he added.

CRUDE PRICE FALLS
A modest silver lining for European petrochemicals players in the economic gloom is some potential margin claw-back from the precipitous drop in oil pricing, with Brent crude futures trading at slightly over $26/bbl as of 25 March, despite the announcement of a $2tr stimulus package by the US government the previous evening.

While the drop in oil prices may once again level the playing field for European consumers of crude feedstocks compared to lower-cost players elsewhere, the benefit may be limited by the underlying drivers of the collapse, according to Zachert.

“[All things being equal], an oil price decline leads to lower input costs… having said that, of course if the oil price also signals also a lack of demand due to a collapse in GDP then of course it has also negative implications for the industry,” he said.

“Oil prices also went down because China was impacted by coronavirus, production was at a standstill. A lot of the biggest oil consumers from the Middle East are from China, where business drastically went down in February and still has not fully recovered,” he added.

SHARE BUY-BACK: ALL GOOD 
Chemicals company stocks have been hit hard alongside the wider financial market, with LANXESS’ share price falling 34% in the last month and 47% since November 2019.

The company’s share price has been “penalised”, Zachert said, echoing complaints by other European CEOs such as Evonik’s Christian Kullmann and Arkema’s Thierry Le Henaff.

The low pricing offers an opportunity to buy up shares, with the first tranche of a €500m purchase programme planned for the next 12 months.

Despite the cancellation of share buy-backs by numerous companies including Shell, Total and Stolt-Nielsen, to preserve liquidity in the face of the crisis, LANXESS intends to continue with its programme, which has already begun.

“The nice thing is we are a company that can afford a share buyback in the current times, and that means that we have done a lot right in the last few years to have such an ample financial room to manoeuvre,” Zachert said.

REORGANISATION
In the meantime, the company is concentrating on investments into its own operations, the share buy-back, and expanding its focus on consumer-focused chemicals.

LANXESS is looking to push further into antimicrobial and water treatment technologies with the creation this year of a new business unit, consumer protection, replacing performance chemicals.

The unit comprises the material protection and liquid purification divisions of that unit and folds in pharmaceutical and agrochemical ingredients business Saltigo, while inorganic pigments operations will be moved to the advanced intermediates division.

The rationale for folding antimicrobial, water purification and active ingredients operations into a single pillar is that these operations are not particularly exposed to demand cycles and require a strong degree of regulatory expertise, according to Zachert.

Since Zachert was brought back in to the fold to turn the company around, LANXESS has fundamentally shifted what the company does, from a rubber and plastics-focused firm into a more specialties-oriented producer.

The evolution of the company’s portfolio continues, but LANXESS overall is significantly more resilient than it was when its revenues were overwhelmingly generated from the rubber and automotive sectors, Zachert noted.

“If rubber was still in the portfolio, 2019 would have been a horrific year,” he said.

“Now we are one of the few companies that went through 2019 with complete stability and improvement in margins, walking through a crisis upright.”

Front page picture: LANXESS' headquarters in Cologne by the River Rhine in Germany
Source: LANXESS 

Interview article by Tom Brown