Dusseldorf The plastics manufacturer Covestro is preparing for stronger growth in the coming years with a new investment program worth billions. At the same time, the Dax group is starting the next phase of its transformation into a company geared towards circular economy.
From 2022, investments will “increase towards one billion euros annually from the current 800 million euros and go into organic growth and sustainability transformation,” said CEO Markus Steilemann of the Handelsblatt. For the development of new products based on renewable raw materials instead of oil, the group will provide a further billion euros over the next ten years.
The expansion should not be at the expense of profit. On the contrary. “Covestro will become a significantly more profitable and high-margin company by 2024,” promises Steilemann. The CEO will present the new strategy to investors on Tuesday afternoon on Capital Markets Day.
The plastics manufacturer is currently benefiting from a special economic situation and has already raised its forecast for 2021 several times. Demand has risen rapidly as the global economy picks up. Because the supply is currently scarce across the industry, the prices for the Group’s products have skyrocketed.
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This continues to drive Covestro’s profit unabated. The result in the third quarter will be “around the upper end of the forecast,” announced Steilemann. The CEO did not want to set a target for 2022.
Steilemann knows that the current situation is extraordinary and that the bottleneck on the market and prices will calm down again. Nevertheless, he is screwing up the target for the medium-term expected profit: In 2024, the so-called mid-cycle Ebitda is to increase from 2.2 billion to at least 2.8 billion euros. This applies to a normal market development – with a new boom it could be significantly more.
A new large-scale plant for rigid foams is to be built
Irrespective of this, the group expects a structurally strong increase in demand. This is being driven by political initiatives to reduce greenhouse gases in China, Europe and the USA. This means, on the one hand, the promotion of electric cars, for which Covestro produces lightweight plastics.
On the other hand, it is about energy-efficient construction. Covestro’s MDI rigid foams are used, for example, to insulate building facades. Because capacities across the industry are already being used to full capacity, Covestro is now resuming plans to build a new large-scale MDI plant.
At the beginning of 2020, the group initially put the investment project with a volume of 1.5 billion euros on hold. Now the new plant, which would be one of the largest in the world, and put into operation in 2026 – but not necessarily as originally planned at the US site in Baytown, Texas.
At the same time, Covestro is examining the construction of the large-scale plant in China. “In the USA, the costs for building new plants have risen significantly in recent years, unlike in China,” explains Steilemann. In addition, the group will no longer have to rely on the cheapest possible energy for the investment to pay off. This was one of the reasons why the plant should first be built in the USA.
A new process technology is to be used in the planned MDI plant, with which 40 percent water vapor and 25 percent electricity can be saved for every ton produced. The bottom line is that carbon dioxide emissions should be reduced by up to 35 percent.
For Steilemann, this investment pays into the overall strategy: The group wants to manufacture more products that are intended to serve climate protection as a whole. Saving energy through better facade insulation, for example, plays a major role in the Chinese government’s sustainability strategy.
Covestro wants to prove its innovative strength
Others are about internal improvement. “The climate problems and the ever increasing consumption of resources in the world are dramatic,” says Steilemann and promises: “We will do everything we can to significantly reduce our footprint.” But he also makes politicians responsible for “finally finding the right ones long-term, reliable framework conditions ”.
“I am looking forward to a government with a lot of strength and will to shape it so that the transformation of the economy to more climate protection can succeed,” said Steilemann. A basic requirement is that the industry is provided with sufficient inexpensive green electricity via resilient networks.
However, he rejects in-depth regulation of companies. “We do not need an overarching policy that believes that it can make better decisions about the selection of technologies for the transformations,” said the Covestro boss. “You should trust the innovative strength of the chemical industry.”
Covestro wants to further prove this ability. The aim of the group is a complete focus on the circular economy. In practice this means: instead of using the fossil raw materials oil, gas or coal, as before, only substances from renewable sources should be used in the long term. This can be recycled old plastics, carbon dioxide or bio-based materials.
How long and difficult it is to get there is shown by the following figures: of around four million tons of raw materials that Covestro uses annually, only 10,000 tons come from certified renewable sources so far. Steilemann promises that this value will grow dynamically in the coming years.
Covestro currently has 45 products based on alternative raw materials in commercial use, the production of which is now to be scaled up. These include flexible foams for mattresses and sports floors, where the required carbon does not come from crude oil, but is obtained from carbon dioxide. In new car paints, ingredients based on industrial sugar are used.
With the French oil company Total, Covestro is developing a technology to extract carbon from plant waste on a large scale. A further billion euros are now to be invested in such projects over a period of ten years.
Analysts anticipate a strong year 2022 for the group
In view of the time span and the challenge, that doesn’t seem like much. Steilemann, on the other hand, argues: “We will design the conversion to renewable raw materials and products so that we can continue to use our existing systems.” This means that all investments in systems would contribute to the sustainability strategy.
The analysts at Baader Bank expect Covestro to be able to finance further investments without any problems. The group currently has a large amount of freely available funds from its cash flow. Baader Bank assumes that 2022 will also be a strong year for Covestro.
The board does not want to rely on that. He has recognized the potential for cost reductions in the new group structure that has been in place since July. This applies above all to the newly created “Solutions and Specialties” segment, in which higher-margin specialty businesses are bundled.
With an Ebitda margin of eleven percent, this segment, which is important for Covestro, is still below the targets set by the Executive Board. “There is more in it. With a normal economic development, that is, without special economic activity like this year, we want to achieve 17 percent by 2024, ”says Steilemann. Overall, the Group’s fixed costs should be back at the 2020 level in 2023.
Downsizing is not ruled out. The company has already said that 1,700 jobs are at stake worldwide. “That is not a set number, but a theoretical maximum that we determined in the early phase of our plans,” says Steilemann. “Downsizing is not a priority for us, but there are certain tasks and processes that we want to do differently.”
More: Corporations raise forecasts more often than ever – euphoria in the upswing year.