INSIGHT: Chemicals specialisation, focus on sustainability paying dividends in tough operating environment

LONDON (ICIS)–Specialisation and a focus on higher added value chemicals and services provided some shelter from the storm for certain producers in Europe in the third quarter.

It remains to be seen, however, if some of these more niche businesses, at least when compared to upstream chemicals and first-line intermediates and polymers, can bear the brunt of the downturn.

Upstream players in Europe’s chemicals sector are feeling the pinch of reduced downstream offtake, with reported extreme caution amongst buyers not certain of their demand outlook and not necessarily prepared to pay more for products made in such a high-cost environment.

Europe’s chemical industry in general is in a difficult and potentially domestically precarious position with the more energy-intensive operators and their value chains at an increasing cost disadvantage.

Certain parts of the sector could reach a “point of no return”, warned last week the CEO of Brenntag, the world’s largest chemicals distributor, Christian Kohlpaintner.

There are the short-term, winter 2022-2023 challenges and then those that could persist, or even take a deeper hold on competitiveness, in 2023.

The more energy and carbon-intensive segments are clearly the more exposed.

Every company is working to reduce natural gas and electricity requirements while thinking deeply about mid- and longer-term strategies as the need for greater sustainability grows in the face of rising carbon costs.

The CEO at Germany’s chemicals major LANXESS, Matthias Zachert for instance, was blunt about prospects in Germany where, he indicated, “red tape” is such a burden.

The company’s more geographically diversified divisions did better in the third quarter than those centred largely on Germany.

“We will keep investing worldwide, but in Germany we will just concentrate on maintenance and on sustainability investments. No enhancement of capacity will be made in Germany,” Zachert said.

The LANXESS portfolio has been shifted towards a series of focused specialty chemical businesses and that does appear to have been paying off.

The company made it clear, however, that specialities, while providing some protection against the energy crisis and the economic downturn, are suffering from weaker demand.

LANXESS reported an 8% year-on-year increase in net profits for the quarter, built on significant sales increases in all segments.

The top line increases, however, were driven by price and foreign exchange (FX) against the weaker euro. Full pass-through of “inflated” raw material and energy costs was achieved but volumes were lower, the company said, due to softer demand.

France’s Arkema described its Q3 financial performance as “very solid” and driven by North America and a focus on sustainability.

The outcome was clearly driven by the company’s Specialty Materials segment, where sales were up 26% year on year – and earnings before interest, tax, depreciation, and amortisation (EBITDA) were 8% higher.

Arkema said there had been growing demand for high added-value solutions in batteries, light weighting, bio-based and recycled materials, and 3D printing.

Volumes were down globally, however, but there were “contrasting trends by region and end-market”.

That statement highlights the complex nature of the demand environment for chemicals and materials globally. There is overarching pressure on demand, but the cost environment is different regionally, likewise the dynamics of supply and demand.

Arkema described a more challenging and uncertain global operating environment in the second half of the year, marked by the energy crisis in Europe and a slowdown in demand “amplified temporarily by some destocking, and elevated inflation”.

These are the two factors that clearly concern players up and down chemical value chains towards year-end 2022.

There have been suggestions in Europe that customers of the sector will shut down for longer over the turn of the year, sentiment that has already put pressure on demand for upstream petrochemicals.

Germany’s Evonik reported what it called “solid results” for the third quarter, with EBITDA supported by an 8% increase in Specialty Additives performance.

The company said it had high visibility” on energy cost development and gas supply for its businesses, while contingency measures include triple-digit million euros of cost savings, its ability to generate cash, its strong balance sheet, and liquidity position.

A focus on sustainability and “defensive” end-markets is expected to pay off.

For Evonik, these include additives for renewable energy production, for example, its Health & Care segment businesses, and its new capacities into favourable nylon 12 (or polyamide 12, PA 12) markets.

Insight by Nigel Davis