Dusseldorf As a plastics manufacturer, Covestro has major customers in almost every industry and region – the Dax group therefore always has a good insight into the world markets. From the point of view of CEO Markus Steilemann, the situation there is still very tense. Economic slowdown in China, high inflation in Europe and the USA, expensive energy – with a view to export-dependent German industry, the manager says: “We are on the way to a recession.”
Covestro has already clearly felt the downturn. In the third quarter, demand in the key segments was weak and sales volumes fell significantly.
The robust construction sector was still a bright spot for the plastics manufacturer, unlike the automotive industry. In an interview with the Handelsblatt, Steilemann explained that the downturn was strongest in the sectors that benefited during the corona pandemic.
Furniture, televisions, electronic products are among them. During the pandemic, consumers stocked up on it, and now sales are faltering.
“We don’t see a trend reversal,” says Steilemann and is skeptical about supposed signals that the mood in the economy is currently improving again. The markets are highly volatile, producers only lead on sight, and there is a lack of clear impetus to be able to make a forecast for the coming year.
Covestro only achieves the lower end of the forecast
Covestro is therefore not expecting much from the fourth quarter, which is traditionally weaker in the chemical industry. The group adjusted its profit forecast for 2022 on Tuesday and will only reach the lower end of the previously mentioned range: adjusted profit will be between 1.7 and 1.8 billion euros. Covestro had previously considered a value of between 1.7 and 2.2 billion euros possible.
Analysts had expected more; on the stock exchange, the announcement was interpreted as a renewed profit warning. On Tuesday, Covestro shares temporarily fell by six percent to EUR 33.50. It has already lost 40 percent of its value this year, and the Dax 40 fell by 20 percent in the same period.
The results for the third quarter were already slightly below the analysts’ estimates. Covestro’s adjusted earnings (Ebitda) fell by 65 percent to 302 million euros, the bottom line is that the group was just in the black with a net profit of 12 million euros.
This was not only due to falling sales volumes, but also to the massively increased costs for energy and raw materials. Gas plays a major role for the plastics manufacturer in production as a heat supplier. Unlike in the first half of the year, however, Covestro was no longer able to fully pass on the burden through price increases.
In view of the looming recession, the management now wants to take countermeasures. “We will have to deal with this unprecedented environment for the time being. We are therefore using all the levers available to us to guide Covestro well through the current situation,” says Steilemann.
The results for the third quarter were already slightly below the analysts’ estimates.
(Photo: Covestro)
The CEO does not want to deviate from the basic strategy. In view of the historical price increases for oil and gas, he sees his plan to convert the group to green energy and renewable raw materials as confirmation.
In the long term, Covestro no longer wants to use raw materials based on oil and gas. “We will drive the change forward with full force and in some areas we will even strengthen it,” announces Steilemann.
He cites energy efficiency as an example: With high gas and electricity prices, projects to convert production would now pay for themselves within months instead of years. This applies, for example, to the use of process steam, which is important in chemical production and is now monitored and controlled by digital sensors at Covestro.
Travel and consultant budgets are saved
For the Covestro boss, the gas price that has currently fallen on the spot markets is not yet a sign of relaxation. The European market is very volatile, and even at the current level of 100 euros per megawatt hour, gas is five times more expensive than before the crisis. The group is preparing for a permanently higher level of energy costs.
Steilemann calls the green conversion a “marathon”. But it is clear to him that he must also deliver on short-haul routes. And that means in the current situation: relief through cost reductions. At Covestro, many expenses are now on the table for consideration – travel expenses, budgets for consultants and investment projects that may be postponed.
The group is not planning any job cuts and is not communicating any targets for cost reductions. Competitor BASF has already opted for an austerity program that aims to reduce spending by half a billion euros, especially at the German and European locations.
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The planned government relief for gas costs is the right step for Steilemann: “I welcome the proposals and hope that all projects can be poured one-to-one into a legal text that also withstands the state aid examination.” By that he means possible objections that the EU Commission could raise because of the state subsidy for the German economy.
Legally secure relief should come as soon as possible. In this way, the population’s propensity to consume could increase again, and the complex value chains in companies could be secured. “The gas price brake can be adrenaline for the chemical industry and the economy,” says Steilemann.
At Covestro, bulk business was responsible for the slump in profits in the third quarter. In the Performance Materials division, the Leverkusen-based company bundles the sale of soft and hard foams, such as those used in upholstery, car seats and facade insulation. In addition, there is the transparent plastic polycarbonate.
The division’s operating result fell by 93 percent to just 53 million euros. This clearly shows how reluctant customers are when ordering new plastics.
The volume sold also fell in the Solutions & Specialties segment. It contains the high-quality, innovative plastics. The operating result increased by 27 percent, but this is also due to a comparatively weak previous year’s figure. All the same, profit margins remained stable in this segment because Covestro was able to offset the higher raw material and energy costs with price increases.
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