Covestro braced for weak 2023 as energy, pricing headwinds persist

LONDON (ICIS)–Covestro expects 2023 earnings to fall below last year’s following a sharp increase in energy and raw material prices since early 2022 and difficulties in passing on those costs to consumers.

The Germany-based isocyanates, polycarbonates (PCs), coatings and adhesives player reported a net loss of €272m for the year, driven by an €899m loss in Q4 due to lower volumes and a reduction in its ability to pass on higher costs amid a sluggish market.

in €m	Q4 2022	Q4 2021	% change	FY2022	FY2021	% change
Sales	3,964	4,338	(8.6)	17,968	15,903	13.0
EBITDA	(38)	663	–	1,617	3,085	-47.6
Operating profit	(695)	445	–	267	2,262	-88.2
Net profit	(899)	302	–	(272)	1,616	–
Performance Materials EBITDA	(89)	590	–	951	2,572	-63.0
Solutions & Specialties EBITDA	108	112	(3.6)	825	751	9.9

Looking ahead, earnings before interest, taxes, depreciation and amortisation (EBITDA) at the solutions and specialties division are expected to be broadly steady with the €825m generated last year, but group and performance products earnings are likely to be “substantially below” 2022 levels this year.

“The [performance materials] segment is closely correlated to market demand and this limits our ability to pass on energy and commodity prices in a recessionary environment,” said CFO Thomas Toepfer, speaking at a press conference.

Performance materials EBIT fell to negative €600m in Q4 when energy prices in Europe were at their highest level since the onset of the Ukraine war.

The impact on solutions and specialties EBIT was less dramatic at a negative €37m, but energy and feedstock costs weighed on profitability across group operations.

Average product profitability margins fell from 37.6% in the closing months of 2021 for performance materials to minus 1.3% in Q4 2022, while specialties margins fell 22.3 percentage points year on year to 3.3%.

Economies from investments in energy efficiency were counterbalanced by the company’s reliance on chlorine as a raw material, an energy-intensive chemical to produce that feeds into two-thirds of Covestro’s portfolio, according to CEO Markus Steilemann.

The increasing cost of chlorine production in the wake of surging European energy expenses forced Covestro to form an interdisciplinary group to find measures to reduce costs, including choosing days and times to produce when pricing was lower, Steilemann said.

“Colleagues developed a model to anticipate the development of electricity prices on a monthly basis, so they can determine on which day and at what time of day it’s best to operate the facility so that the production can be done at optimal prices,” he said.

Despite the increasing focus on specialties via steps such as the purchase of DSM’s resins and functional materials business, a significant portion of Covestro’s growth is tied to market demand which proved tepid last year.

Construction sector growth was slow at 1.2% in 2022 for the company, and the furniture sector contracted 3.6% after growing 8% in 2021. Elsewhere, electronic and household appliance demand growth last year was less than one-third that of the year before, added Steilemann.

BASF announced last week that it would shutter its Ludwigshafen, Germany, toluene diisocyanate (TDI) plant after opening it in 2015.

Extended production issues at a start-up for that plant drove strong profitability for Covestro, a key player in the sector, in 2015-16. However, Steilemann was less bullish about the prospect of tighter markets in 2023, stating that the company was committed to producing in the regions it sells into. European TDI industry average margins remain negative in early 2023.

“The year 2022 was a difficult one for the entire chemical sector. This was no different for us either, of course, we had and still have countless global challenges and to contend with and expect the current fiscal year to be characterised by major challenges as well,” Toepfer added

Focus article by Tom Brown

Thumbnail picture: Covestro’s corporate headquarters. Source: Covestro