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Covestro Q1 earnings driven by volumes and prices

Posted on May 16th, 2017 by in Chemicals Industry News and Analysis


Higher prices for key intermediates in Asia and the knock-on effect in other parts of the world in the first quarter has, not surprisingly, helped lift returns for the petrochemical majors.

Polyurethanes and polycarbonate producer Covestro attributed some of its significant first quarter earnings increase to the fly up in TDI (toluene diisocycanate) margins in the quarter.

Covestro said that around half of the 125% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) for its polyurethanes segment in the first quarter was due to the fly up in margins, mainly in TDI. ICIS data show TDI prices climbing in Europe through 2016 and into 2017 with prices lower than in Asia, prompting exports to the region.

The price increases have been due largely to market pull and, in China, to customers re-stocking before the Lunar New Year holidays.

The Covestro numbers show, management said, strong demand for TDI and MDI (methyl di-phenylene diisocycanate). Core volume growth for its polyurethanes segment was 6.8%, it said. Strong demand for TDI and MDI led to a quarterly polyurethanes segment sales increase of 25.8%. Covestro reported “strong volume leverage and structurally higher margins, mainly in MDI”.

Volumes for the group were up 13% in Asia Pacific, the company said, while growth rates of 7% were achieved in Europe and the North America Free Trade Area. Asia Pacific and China growth was driven by each of the company’s three segments – polyurethanes, polycarbonate and coatings, adhesives and specialties (which has the acronym CAS).

Double-digit volume growth was driven by polyurethanes and polycarbonates in Germany. Encouragingly, there was a strong rebound in Latin America. Covestro said Asia Pacific and China demand was strong in the electrical, automotive and furniture industries.

In its second largest segment, polycarbonate, Covestro reported a 14.7% increase in what it called ‘core’ volumes and a “broad-based acceleration of demand growth”. This part of the business was not so much driven by price increases (which were up 2.9% in the quarter year on year.) The company is clearly benefiting from a favourable supply/demand balance. Segment EBITDA was up 31.1% and segment margins were higher at 24.3% from 22.5% in the first quarter of 2016.

Covestro, which has been partly spun off from Bayer, is clearly an attractive business and the growth story for it is stronger than it has been for some time. CEO Patrick Thomas talked of the growth momentum seen in 2016 continuing into the first months of the year. Capacity utilisation rates for its products were very high and the company benefited from slightly accelerating global GDP growth.

The company is buoyed by continued demand, particularly in China, and Thomas pointed out this week that it also now can make good money there. China used to be a high investment and low returns part of the world for the materials producer. “We can now structurally earn returns in China similar to the USA and Europe,” he said.

China’s demand for vehicles and its drive towards electric powered vehicles is helping lift demand for polycarbonate and polyurethanes.

Thomas said that China currently is presenting quite a confused picture given the removal of some tax relief on new vehicle sales but the strong growth in the number of electric vehicles being produced. (Electric cars consume about three times the volume of polyurethane and polycarbonate used in conventional automobiles). Production growth is expected to rise by 100% last year, from about 400,000 units in 2016.

China’s government is supporting rapid infrastructure development even in more rural areas. Each autos charging station contains about 8kg of polycarbonate.

Covestro currently sees about 15%/year growth of demand for polycarbonate in automobiles globally. MDI polyurethanes growth in the sector is around 13% with TDI polyurethanes growing at a much more modest 2%.

Management has significantly raised its guidance on cash flow and return on capital employed for 2017 but is being more circumspect on volumes, despite the potential, suggesting a 2017/2016 low to mid-single-digit increase compared with 2016.

Thomas pointed to the fact that there was some re-stocking and pre-buying in the first quarter. Globally there will be more scheduled production plant maintenance in the second and third quarter that will limit availability.

Covestro is also shifting its strategy to increase its inventory of higher benefit grades and that will limit is potential volume growth in coming quarters.

Thomas said, however, that Covestro will be able to achieve pricing deltas in the second quarter about as strong as those seen in Q1 on the back of this limited core volume growth. “The availability of industry capacity remains limited,” he said while demand remains healthy.

The company says that MDI industry operating rates are believed to be around 90% currently, a fact that drove it to maintain production in Tarragona, Spain.

Realistically, MDI capacity growth is around 2.6%, he said, which is below the growth of market demand.

Global TDI industry capacity utilisation is somewhere in the low 90s, he suggested, with a compound annual growth rate of capacity of about 6%, slightly above TDI market growth of 3-4%.

Polycarbonate operating rates of around 80% create what he called a “pretty tight” and “quite tricky” situation for producers in their ability to meet demand. Polycarbonate capacity additions are running at a growth rate of about 3.7% annually, just below industry demand growth rates of 4%.

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