LANXESS to invest €500m in North America through 2022

LANXESS produces engineering plastics for the automotive industry at its site in Gastonia, North Carolina, US

Germany-based LANXESS is set to invest around €500m in North America through 2022 to upgrade sites and expand capacity mainly through brownfield expansions, its CEO said.

“In North America we plan to upgrade our asset footprint. At many sites we will upgrade process technologies and consider some significant capacity expansionsm,” said CEO Matthias Zachert in an interview with ICIS.

“We are running detailed feasibility analysis and will make announcements in the next 12-18 months,” he said.

At El Dorado, Arkansas, US – its largest site in North America which also includes the second-largest bromine reservoir in the world – LANXESS plans to invest €50m to expand derivatives capabilities.

“Here we take bromine out of the ground, and produce derivatives such as innovative flame retardants, primarily for polystyrene (PS) foam insulation used in buildings, which reduces CO2 emissions,” said Zachert.

Along with flame retardants, lubricant additives is another core pillar for LANXESS and an area which could see significant capital investment, he noted.

“We also like urethane solutions which we acquired from Chemtura, and would equally consider expansions in the polyamide value chain,” said Zachert.

An expansion in urethanes or polyamide would likely take place at the company’s Gastonia, North Carolina, site, which produces castable urethane pre-polymers for products in the recreational and industrial markets, as well as two lines for engineering plastics compounding.

“In Gastonia we onboarded [a second compounding line] two years ago, and are considering adding a new line,” said Zachert.

POLYAMIDE CHAIN

In polyamide, “new products we launched in the last few years have been well received by the auto industry”, the CEO said.

LANXESS produces the entire polyamide 6 (PA 6) value chain, from caprolactam to PA 6 base resin to the specific formulated engineering plastic product by adding additives and glass fibres.

However, in PA 6,6, it buys the PA 6,6 base resin and adds compounding technology to produce engineering plastics.

With the shortage in PA 6,6 amid force majeures and price escalation, customers are becoming eager to test PA 6 products, noted the CEO.

“The trend has been accelerating in the past 3-6 months, where customers, even in Asia and Japan where they have long been sticking with existing [PA 6,6] formulations, are asking about switching [to PA 6],” said Zachert.

PA 6 and PA 6,6 engineering plastics are “relatively similar due to technology enhancements in additives such as flame retardants, antioxidants and glass fibres”, he added.

The North American market, largely from legacy DuPont technology, has been based more on PA 6,6 while the European market has primarily featured PA 6, he said.

ELECTRIC VEHICLE IMPLICATIONS

On the emergence of the electric vehicle, which requires far less high temperature resistant engineering plastics than traditional combustion engines, LANXESS sees the positive lightweighting aspect of its plastics outweighing (so to speak) the negative related to less need on the temperature side.

“Clearly we see this coming as we’ve seen a lot of activity in the last two years among Tier 1 and 2 [automotive suppliers]. We will see an acceleration in e-mobility from 2020 onward,” said Zachert.

“With e-mobility, lighter weight is far more important because the battery is heavy, and the performance on distance is not there yet. So we performed a detailed analysis and implication for PA, and concluded it is a net positive for our business,” he added.

ADVANCED INTERMEDIATES

While flame retardants, lubricant additives and the polyamide value chain are key areas for North America investment, one should not rule out advanced intermediates, said the CEO.

“There’s a possibility with the acquired Chemtura asset base that we can expand in intermediates. We have a nice DPA (diphenylamine) joint venture business with Huntsman called Rubicon in Geismar, [Louisiana],” said Zachert.

DPA is used as an antioxidant for lubricants as well as an intermediate for dyes, agrochemicals, pharmaceuticals, and rubber and plastic additives.

TRADE CONSIDERATIONS

LANXESS is planning to make these North American investments even as the US is ratcheting up trade disputes with China, the EU, Mexico and Canada, among other nations.

“It is a concern from a macro standpoint. If we suddenly end up in a trade war, the world would be hurt substantially,” said Zachert.

“From the El Dorado, Arkansas facility, over 50% of the profitability is generated outside the US. If we were to lose our export opportunity to the EU, and China, it would play into the hands of competitors. It is difficult to recapture business after supply chains have changed,” he added.

However, the CEO is optimistic on the eventual outcome of the trade disputes.

“History teaches us that trade wars are lose-lose and that they do not increase local production. Our base case is that politicians find solutions and that we continue with our [capital spending] strategy,” said Zachert.

“However if there are no solutions, then we will adapt and adjust – we won’t just keep walking in the wrong direction,” he added.

M&A STRATEGY

LANXESS already expanded its footprint in North America in a big way through its €2.4bn acquisition of US-based specialty chemicals company Chemtura in April 2017. It also acquired US-based Chemours’ clean and disinfect business for €210m in September 2016, then most recently Solvay’s phosphorus additive business in February 2018.

Through these acquisitions, LANXESS has doubled its number of sites in North America to 24, offering many more opportunities to upgrade and optimise operations.

“For the former Solvay phosphorus chloride operations in Charleston, South Carolina, we have technology in Europe where we can now bring innovative derivative products in flame retardants and also polymer additives to market,” said Zachert.

Going forward, LANXESS is gearing up for more deals in its key business sectors.

“The operational integration of Chemtura was completed in 2017, so we are open for M&A. We are preparing many strategic ideas, and will see what opportunities might be best for us,” said Zachert.

“We like all four pillars for the new LANXESS. There is no pillar where we are uninterested,” he added.

The four pillars of the “new LANXESS” are Advanced Intermediates, Specialty Additives, Performance Chemicals and Engineering Materials. The new LANXESS excludes ARLANXEO, its 50/50 synthetic rubbers joint venture with Saudi Aramco.

“We will not shy away from big acquisitions, but the likelihood is higher for bolt-ons and mid-size deals,” said Zachert, who considered Chemtura a mid-size deal.

LANXESS was reported in the media to be one of the bidders for AkzoNobel’s specialty chemicals business, partnering with Dutch pension fund PGGM.

The Carlyle Group and GIC eventually won the deal for €10.1bn.

On divestitures, LANXESS has flagged its leather chemicals business for restructuring, which is expected to take one to two years, followed by a potential partnership, said Zachert. The ARLANXEO venture is under a five-year lock-up agreement, of which 2.5 years is left. After this, the partners will decide on the next step, unless they decide to make a move earlier.

The CEO calls LANXESS’ pharmaceutical and agrochemical custom synthesis business Saltigo a “great business” that has emerged from an agricultural sector trough in relatively good shape.

“When ag returns, this will be a good business. We have great technology here,” said Zachert.

CAPITAL DISCIPLINE

LANXESS will remain disciplined in its plan to spend €500m in capital in North America through 2022, said the CEO.

“We have been very disciplined in investments in the past under my management and [equity] analysts and investors have seen nice financial returns,” said Zachert.

“Before this, a greenfield project in synthetic rubber would cost over €400m. In the new LANXESS, greenfield sites will not reach this level of magnitude,” he added.

LANXESS overall plans to spend €450-500m in capital worldwide in 2018.