LONDON (ICIS)--Covestro is mulling more capacity expansions on the back of strong demand and due to the healthy free cash flows it expects to generate in coming years, which equally “could be used” to acquire specialty chemicals firms, executives at the German chemical major said on Tuesday.
Sales rose by 17% year on year to €3.5bn during the second quarter while earnings before interest, tax, depreciation and amortisation (EBITDA) were up by 56.5% at €848m, the company said.
For the first six months of this year, the company’s net income surged to €952m from €412m in January-June 2016. Sales were up by 20.8% at €7.08bn in the first half of 2017.
The positive financial results for the second quarter did not help, however, Covestro’s share price – by 10:45 London time, the company shares were trading at €64.53, down 1.19% compared to their close on 24 July.
Covestro is eyeing expansions at its European plant due to bottlenecks which actually took their toll during the second quarter in volumes, with declines in the polyurethanes division by 2.3% year on year a result of “constrained” product availability for toluene di-isocyanate (TDI) and methyl di-p-phenylene isocyanate (MDI).
Both MDI and TDI are widely used for the production of different type of foams, and shortages throughout 2017 have caused prices for both products to spike, with the European July TDI contract settling at €3,040-3,190/tonne FD (free delivered) W (west) Europe, up from €2,990-3,140/tonne FD W Europe in June.
The European June MDI contract was also settled higher on the back of availability problems, at €2,590-2,710/tonne FD W Europe, up from May’s €2,540-2,660/tonne FD W Europe.
The fall in volumes at the polyurethanes division during the second quarter was preceded, however, by a healthy rise of 9% in the first quarter.
The decrease did not affect profitability at the division, with EBITDA more than doubling during the second quarter, year on year, to €556m, with sales jumping 27.5% to €1.89bn. Pricing power also increased at this division, with selling prices increasing by 27% year on year.
“In the interest of optimally meeting high demand, Covestro had already announced a decision in March to continue production of the rigid foam precursor MDI in Tarragona, Spain, for the time being,” said the company, backtracking on a 2015 decision to cease operations for that material at the site.
The company also said in 2016 that it would convert an idle TDI plant in Brunsbuttel to an MDI plant, thus increasing the site's MDI capacity to 400,000 metric tons per year by the end of 2018.
Within the Polycarbonates division, volumes during the second quarter rose 0.7% year on year, preceded by a rise of 8.5% in the first quarter. Profitability was not affected either, with EBITDA rising by 3.1% to €197m on 9.6% higher sales at €911m.
Pricing power at this division increased by 6.1% year on year.
“This lower growth rate [in volumes] in the second quarter resulted from the constrained volumes available in Europe…. To address growing demand, particularly in the APAC [Asia-Pacific] region, Covestro plans to further expand its plant in Shanghai, starting in 2019,” said the company.
Covestro said in May it was to add 200,000 tonnes/year in polycarbonate (PC) production capacity to its 400,000 tonnes/year plant in China.
The company’s smallest division, Coatings, Adhesives, Specialties, posted falling sales volumes (down 3% year on year during the second quarter) and falling EBITDA, down 19.7% to €114m, on the back of higher raw material costs and the decreasing sales volumes.
Sales managed to stay in the positive, up 0.2% to €533m year on year.
“We want to continue to take advantage of the ongoing robust demand for our products as much as we can. Especially in the Polyurethanes and Polycarbonates segments, we will further invest in our production plants and take steps to eliminate bottlenecks,” said Covestro’s chief commercial officer Markus Steilemann.
In June, Bayer’s ownership of Covestro went under the 50% barrier following a further disposal of shares at the subsidiary. European chemical analysts expect a full disposal in the near term as Bayer would seek financing for its proposed acquisition of US agrochemicals major Monsanto.
After a turbulent few months at the top of Covestro following the resignation of its CFO, Frank Lutz, in May, which followed the CEO’s own announcement that he would leave the company in 2018, Covestro said on Tuesday it continues to seek a replacement for Lutz.
Markus Steilemann will take over as CEO in September 2018, said Covestro, a decision which some German media reports linked to Lutz’s own resignation.
(Adds updates throughout)Additional reporting by Nurluqman Suratman and Pavle Popovic
Image: Covestro HQ at Leverkusen (source: Covestro)