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October 26, 2022
BASF SE (BASFY) Q3 2022 Earnings Call Transcript
Oct. 26, 2022 11:56 AM ETBASF SE (BASFY), BFFAF
BASF SE (OTCQX:BASFY) Q3 2022 Earnings Conference Call October 26, 2022 5:00 AM ET
Company Participants
Stefanie Wettberg – Investor Relations
Martin Brudermuller – Chairman
Hans Engel – Chief Financial Officer
Martin Brudermuller
Good morning, ladies and gentlemen. Two weeks ago, BASF released preliminary figures for the third quarter of 2022. Today, Hans Engel and I will provide you with further details regarding our business development. Despite the continued strong headwinds from high raw materials and energy prices as well as slowing economic activity, BASF achieved solid EBIT before special items in the third quarter of 2022. Our downstream segments improved earnings considerably. In the upstream segments, however, earnings declined significantly from the very high levels in the prior year quarter.
Let’s start with a snapshot of the current challenging market environment. Compared with Q2 2022, the global macroeconomic environment was significantly weakened. There are no indications of improvement from the markets in the short-term. High inflation and the sharp increase of energy prices led to a slowdown in consumer demand, particularly in Europe. China recorded growth, but particularly because of a strong base effect due to the power shortage in the prior year quarter and its economic development continued to be impacted by the restrictions to reduce the spread of COVID infections.
Global automotive production was a positive surprise in Q3 2022. It increased in all regions compared with the prior year quarter. Q3 2021 was however the quarter in which chip shortages peaked. After the COVID related lockdowns in the second quarter of 2022, automotive production in China developed significantly better than anticipated. IHS Markit has adjusted its forecast for global automotive production in 2022 to 81.8 million units. Compared with 2021, this would be an increase of around 6%. Central banks have further raised interest rates in recent months. This will more and more dampen construction and consumer spending in the coming months and will likely result in lower growth in 2023.
Let’s now briefly look into – look at the chemical production by region in Q3 2022 before we turn to the financial performance of BASF. Based on the currently available data, global chemical production grew by 2% compared with the strong prior year quarter. While China and North America recorded growth, chemical production declined in Europe and in Asia, excluding China.
According to recent released data, growth in Mainland China was surprisingly high, partly due to the industrial power cuts in the prior year quarter of last year. In Europe, chemical production declined on account of lower demand and higher energy prices, which in some cases led to reduced or temporarily shutdown production at different stages of the value chains. Lower demand and increased energy prices were also the main reasons for the decline in Asia, excluding China.
Let’s turn to the BASF key customer industries. I will selectively comment on the most relevant developments shown on this slide. The transportation industry continues to benefit from pent-up demand globally, particularly in China. As mentioned, global automotive production increased compared with the low level of 2021, but is still restricted by semiconductor availability.
In agriculture, the demand environment looks solid overall. However, prices for some crop commodity products have come down recently, but remain on an above average level. The construction industry, particularly in North America and in Europe, is deteriorating because of interest rates. In China, the overheated residential segments continued to decline. In summary, construction and consumer spending with the exception of automotive are weakening.
I will now move on to BASF’s business development. In the third quarter of 2022, EBIT before special items declined by €570 million – €517 million and amounted to €1.3 billion. Additional costs for natural gas in Europe are one major reason for this decline. If we look at the segments, the solid EBIT before special items in Q3 came primarily from BASF’s downstream segments. They considerably improved earnings, mainly on account of further price increases. In line with our guidance for the full year, earnings in the Upstream segment declined considerably with softening demand from the very high levels in the prior year quarter.
Natural gas prices increased further compared with the already elevated levels in Q3 2021. In the first 9 months of 2022, the additional costs of BASF’s European sites amounted to around €2.2 billion compared with the same period in 2021. To mitigate these higher costs, we have implemented further price increases and we continue to work on technical optimization projects, particularly at our largest site in Ludwigshafen. Reduced plant utilization in Q3 2022 also helped to limit the burden of high natural gas prices in cases where the market did not absorb the additional costs.
I will now give you additional information on earnings development in the regions. If you look at the bar for 2015, you can see that Germany, Europe, excluding Germany and the other regions each contributed around one-third to BASF’s Group EBIT before special items in that year. In the strong year of 2021, Europe, including Germany, contributed only one-third, while the other regions contributed two-thirds.
In the course of 2022, earnings have softened further and we saw a particular deterioration in our German operations. In Q3 2022, we recorded negative EBIT before special items of €130 million in Germany. The lower earnings in Europe and in Germany in particular are due to a variety of reasons. In our recent announcement, we summarized them under the term deteriorating framework conditions. There are essentially three developments.
First, the European chemical market has been growing only weekly for about a decade. In the period from January to August 2022, the chemical market shrank by 2.1% in EU 27 and by 6.8% in Germany compared with the same period in 2021. Second, the significant increase in natural gas and electricity prices over the course of this year is putting pressure on chemical value chains. We expect structurally higher and volatile natural gas prices in Europe also in the mid and long-term. And third, uncertainties due to the enormous number of regulations planned by the EU are waiting on the chemical industry. The current development underlines once again the importance of a balanced regional footprint.
The challenging framework conditions in Europe endanger the international competitiveness of European producers and force us to adapt our cost structures as quickly as possible and also permanently. This is why we initiated a cost savings program, focusing on Europe and Germany, in particular, which we announced on October 12. With this program, we aim to streamline non-production units in operating, service and R&D divisions as well as in the corporate center.
The cost reduction measures will be fully implemented until the end of 2024. Short-term cost savings will be implemented immediately. When completed, the program is expected to generate annual cost savings of €500 million, which corresponds to around 10% of our European costs in these categories. More than half of the cost savings are to be realized at the Ludwigshafen site. We are currently developing further structural measures to adjust ESS Verbund production Verbund in Europe, in the medium and long-term to the changing framework conditions. We will thus ensure our future competitiveness and significantly reduce our consumption of gas.
We are actually making great progress on this. We expect to communicate details in the first quarter of 2023. At this point, I want to stress we cannot speak our heads into this end and hope that this difficult situation will resolve itself on its own. We, as a company, must act now. Our cost savings program aims to secure our medium and long-term competitiveness in Germany and Europe. We must take decisive action to fulfill our responsibilities to our employees, shareholders and society.
Martin Brudermuller
Yes. Let me conclude with the outlook. In the third quarter of 2022, economic activity weakened more significantly than expected. Against this background, BASF has adjusted its assessment of the global economic environment in 2022. We now expect GDP and industrial production each to grow by 2.5%. Global chemical production is expected to grow by not more than 2%, down from our previous assumptions of 2.5%. We now anticipate an average oil price of $100 per barrel of Brent crude at an average exchange rate of $1.05 per euro.
Despite the significant weakening of the economic environment since the third quarter of 2022, we confirm BASF’s group’s forecast for the 2022 business year as published in the half year financial report of 2022. We are forecasting sales of between €86 billion and €89 billion for 2022. BASF Group’s EBIT before special items is expected between €6.8 billion and €7.2 billion. We continue to be confident that we can achieve the upper end of this range even so this has become more challenging in view of the current macroeconomic and geopolitical developments. ROCE is likely to be between 10.5% and 11% and CO2 emissions are expected between 18.4 million metric tons and 19.4 million metric tons in 2022.
And now, we are glad to take your questions.
Christian Faitz
Yes. Thank you, Stefanie and good morning and also good morning, Martin and Hans. Couple of questions around the gas complex. First of all, can you share with us your view on how helpful for your Ludwigshafen plant, the first draft proposal of the gas aid scheme by the German government is? And on gas in Europe, just wanted to check that my math is right, looking at Slide 7 in your presentation and comparing this with your Q1 and Q2 charts, is it correct that the Q3 gas price burden for Europe year-on-year was just about €500 million? And then last question on gas, I promise, can you share with us the rough regional distribution of gas sources for your Ludwigshafen plant at present? Thank you.
Martin Brudermuller
Christian, maybe I will start with the first one. I mean, let me first say and this is also what I said in the speech, I think the prime task of companies is to actually help themselves and to improve – and improve their structures. That’s why I am very happy that the BASF team as always in the crisis times is exceptionally creative. I will not give you a number, but I can only tell you we are significantly down where the critical threshold for gas is. We will then report you and give you more background on that in the Q3. So, that reduces the – sorry, Q1 next year. This reduces the vulnerability of the Ludwigshafen site, first of all, because of availability of gas, but then certainly also gives us opportunity to react also on the structural side by shutting down plants and utilization for the main gas consuming products. And I mean, ammonia is the biggest one and you saw that we also adapted over there. So let me clearly say the prime target is certainly that we settle our issues, mainly ourselves. But let me also say that we very much welcome the proposals of the Gas Commission which is also this time clearly also indicating the help for the industry, not only for citizens. And I think it is a little bit early still to say how it works in details, because the proposals are great, but they also have a lot of questions. When it comes to the details, you have also seen in the last days that there was quite a reaction on other EU states. It’s also about a level playing field in Europe in terms of industry. There is also the state aid rules in process, which have to abate to. So I think there is still some work to be done and then giving clear interpretations of this. But also clear, if you look also on our customer base and the smaller SMEs, they really are in a difficult situation, which is deteriorating very, very quickly, because they come already from a difficult situation from COVID time. So, it is really important that this is quick and pragmatic.
But I also want to say very clearly, we have to ask for flexibility and not too strict rules because at the very end, it has to be a combination of both. Yes, there is public money for those companies who need this support and help, but I think there is also an obligation of each company to adapt its structure going forward. because the world is not frozen and it doesn’t make any sense now to give the company’s money and say you have to keep your structure and we wake you up in 3 years when the energy price or energy crisis is over and you just continue where you are, where you have actually stopped because the world is moving too. So I think we need this flexibility to do our own way and then we will see whether we at all needed and what the conditions are for the use of public money. So maybe I will leave it at that point and give the other two to Hans.
Hans Engel
Yes, good morning, Christian. This is Hans. So your first question, I think you did the math correctly, around about €600 million additional cost for natural gas in Europe in Q3. If we look at gas and energy in total, we are talking around about €1 billion per quarter in the first three quarters of the year. Your third question was related to the gas supply sources. We are sourcing in Europe from Western European suppliers, we do not know what their exact supply portfolio has a relatively high likelihood that this is very close to what the overall supply portfolio is in the respective countries of Europe as well as in Europe, more information than that we do not have.
Chetan Udeshi
Yes. Hi, thanks. I was just looking at the Slide #8 again, which shows the earnings split by different regions. And I’m just curious, why is Germany so bad versus rest of Europe because the gas price dynamic is not something which is just German driven. It’s across all of Europe. So why is Germany, particularly so bad at BASF? I guess is there a reflection of maybe a lot of corporate costs at BASF actually sits in Germany. So it’s a bit of an unfair comparison. But I’m just curious underlying like-for-like why Germany so poor versus rest of Europe for BASF right now? The second question was just on Ag division, very strong top line growth, both because of higher volumes but also a very strong pricing. But when I look at the incremental EBIT growth from that top line growth, the drop-through is pretty low. It’s like 15%, 16% of incremental sales flowing through to the EBIT line. I’m just curious why did we not see a much stronger drop-through because it seems that these prices are now strong enough to cover the inflation, hopefully, that is the case. And sorry, if last small clarification is, again, going back to the previous question, €600 million increase in gas costs in Europe in Q3 is actually lower than €800 million to €900 million that we saw in Q1 and Q2, this despite the fact that the gas cost in Europe per megawatt hour was actually in terms of year-on-year increase double of what we saw in Q2. So I’m just curious what like how much production curtailments have you guys taken in Europe as a whole for that number to be closer to €600 million and maybe not even double that number? Thank you.
Hans Engel
Chetan, this is Hans. I’ll start with your question on Germany. What’s important to keep in mind is that Europe does not have one consistent natural gas price and one consistent price for power. Prices in Germany are significantly higher than what you are seeing, for example, in Belgium, in the Netherlands, in the southern part of Europe. And as a result of that, Germany suffers more. I’ll give you an example from the more recent days, Germany sits there and gas here is sold at TTF prices, which yesterday closed at €100 for the 4 months, so €100 per megawatt hour. At this very same point in time yesterday, you could buy spot gas in other countries at prices of €20 to €25 per megawatt hour. Now this is 1 day, probably not something that you can just extrapolate, but we have this – have had the significant differences depending on the regional trading prices within Europe over the last 6 months. And as I said, they are – if you look at it on a daily basis, significant in Germany suffers there in particular.
Now your next question was – since we are on gas, I’ll do the €600 million cost. We have, in fact, in Q3 reduced gas consumption significantly. We have reduced as a result of not running certain plants or running them at lower capacities substituting by way of purchases from the market. To the extent we could, we have also substituted natural gas in the – on the utility side by using alternative sources, i.e., heating oil. So we’ve done what we could. But overall, this is an expression of the fact that we’ve actually consumed significantly less gas. And if your question is how much less is in the order of magnitude of almost 40% lower gas consumption in Q3 than in the prior year quarter.
Last question then was on ag and why don’t you see stronger earnings on significantly stronger sales. So first of all, I think we have €100 million improvement compared to prior year quarter. It is the weakest quarter of the year. That is the seasonality that we have in the business. It comes with significant cost in preparing for the season that has just started in the Southern Hemisphere and then also preparing for the season in the Northern Hemisphere. And there is also a mixed topic here. So that explains why this is relatively low margin. But let me say this, compared to where we were in the prior year, I think our teams in Ag Solutions have done a very good job and €100 million earnings improvement, I think, is also a good basis for a, hopefully, a good quarter for our Ag Solutions business.
Peter Clark
And then the second question is around the cost cutting. The €500 million program, but ultimately the right sizing quite a sizable target of 10% of that cost of the non-productive assets in those units or non-productive unit cost. That implies some headcount reduction. And I thought with the focus on Ludwigshafen the site agreement precluded force redundancies for a while. So I’m just wondering how you square the circle of what you can do to believe in that €500 million then beyond that for the cost cutting? Thank you.
Martin Brudermuller
Yes, Peter, I mean, we have no exact data yet how much – how many positions will be cut off. But if you take the non-production part and the units we mentioned, they are mainly personnel costs. So it goes down into a number of people working at the site. And this is also actually what we want to do. But we have to detail it out because that’s a sensitive issue for the labor unions, certainly. The site agreement is right. That’s a framework, which does not allow us to actually fire people until 2025. But people what is also the reality is that the population in BASF is increasingly getting older. So the number of retirements in the next years goes significantly up. And we have also positions that are not filled as everywhere in the world, you have problems to get experts and well at trained people. So we have some of them released from jobs. We can then also put into, let’s say, positions where we do not get the people on the market. So I would expect that over these 2 years, the majority of these positions will be handled that way. And then let’s see whether we need severance, whether we need then also other means in paying if some people have to leave, but I’m not so worried that we cannot manage this in this time.
When it comes to North America, we don’t talk much about it, but it is also a market, we always look into. Just to remind you that we can spend a couple of hundred millions over there to actually expand our MDI plant, which is a very interesting market. We have really used the opportunity as – the market is actually very balanced, that we are building capacity to absorb that in the years to come forward. So we also not neglect North America. But if you look in the North American market, the last 5, 6 years, it was also not much growing, let’s say, from a local perspective, most of the capacity is going to export and that is also, again, a geopolitical question, whether you want to build capacities in the U.S. than to export in China, we have different assumptions here.
Georgina Fraser
Hi, thanks, Stefi and good morning, everyone. I do have two questions and they are both on the structural adjustments that you’ve been talking to this morning. Firstly, could you maybe give us an idea of how much of the drivers for the structural adjustments are attributed to higher energy prices versus the increased costs of regulation that you’re seeing for the industry margin? And then the second question on the same topic is I mean what happens to the customer industries if there is more broad-based than BASF structural adjustments for chemicals production? Would you expect these customers to invest more outside of Europe? You just also said that you would be looking to do the same with your own production may be moving more towards China? So yes, just your thoughts on that would be very helpful? Thank you.
Martin Brudermuller
So, Georgina, the energy cost is the real driver. I mean regulation is coming. I think I elaborated on the industry Emission Directive, which is an additional burden, which would also then request additional CapEx to actually update the plans that would also, I think dramatically affect the industry. And I am really confident that we get this away or at least pushed forward because that’s no priority topic. But you have to look into base chemicals here in Europe that are heavily depending on natural gas and energy prices and you have to model actually the competitiveness relative to other regions. And then you have to ask yourself producing base chemical in future, let’s say, in Europe and selling into the market, whether this thing makes sense. You have always to consider however that BASF is with the value chains actually adding value in a lot of the base materials by four, five, six, seven steps in the chain. That means you dilute these costs very much to the final products. And you know Ludwigshafen, for example, we have some 8,000 products roughly or even a little bit more, we sell to the markets. Many of them are actually evergreens whenever you do something in the industry, you need these. And we will produce them and then in the future with the PCF reduced or even zero. So, it is more about this considerations of some base chemicals. And I think the most evident one is ammonia, which has a huge part of its cost just from natural gas. And then it strongly depends you make out of ammonia let’s say, a fertilizer or you produce a specialty, a mean, which is a hardener in an epoxy system which has certainly been a much higher margin on that equivalent of ammonia. So, that is the way we look into this. And on the other hand, this is something we have always done. We have always kind ourselves, redefined ourselves with also raw material changes in the past, coal and oil and gas, now more in direct or renewables. So, I think this is a normal exercise, but the real reason for that now is certainly the threat of the energy costs. And then you are directly also with the customers because some of your customers also take consequences and might stop production. So, then you lose the demand here. That is also why we have to very intensively discuss with our customers. And you know that our strategy is actually we invest where the market is. We also look into our customer portfolio, where are the strong guys for tomorrow. It’s not necessary all the time you had served in the past. So, if they don’t have the potential, you go also to others. And then finally, because we talked about regulation, so it’s also about the CO2 price. So, that comes in if you have the energy price, but you have also the avoidance of CO2 if you don’t produce the one or the other product here. So, it’s a rather complicated picture. But at the very end, we have to come to grips and what are the right measures going forward, but it is always market-related. I hope that helps you.
https://seekingalpha.com/article/4549373-basf-se-basfy-q3-2022-earnings-call-transcript
October 26, 2022
BASF: European operations need to be cut to size ‘permanently’
Contributor
Ludwig Burger Reuters
Published
Oct 26, 2022 01:22AM EDT
BASF said costs at sites in its European home market need to be brought to a “permanently” lower level because of a triple burden of sluggish growth, high energy costs and over-regulation.
Adds background on job cuts, Covestro
FRANKFURT, Oct 26 (Reuters) – BASF BASFn.DE said costs at sites in its European home market need to be brought to a “permanently” lower level because of a triple burden of sluggish growth, high energy costs and over-regulation.
“These challenging framework conditions in Europe endanger the international competitiveness of European producers and force us to adapt our cost structures as quickly as possible and also permanently,” CEO Martin Brudermueller said in a statement on Wednesday.
In the first nine months of 2022, natural gas costs at BASF’s European sites were about 2.2 billion euros ($2.19 billion) higher than in the year-earlier period, the company added.
As part of an unscheduled release of preliminary third-quarter results two weeks ago, BASF said it would reduce annual costs by 500 million euros in Europe up to 2024, including job cuts, and it also raised the prospect of more structural cutbacks in the region to be announced next year.
Covestro 1COV.DE, a rival maker of chemicals for insulation slabs and upholstery foams, on Tuesday cut its earnings guidance, as soaring gas and raw material prices burden heavy industry players across Europe.
(Reporting by Ludwig Burger, Editing by Miranda Murray)
October 26, 2022
BASF: European operations need to be cut to size ‘permanently’
Contributor
Ludwig Burger Reuters
Published
Oct 26, 2022 01:22AM EDT
BASF said costs at sites in its European home market need to be brought to a “permanently” lower level because of a triple burden of sluggish growth, high energy costs and over-regulation.
Adds background on job cuts, Covestro
FRANKFURT, Oct 26 (Reuters) – BASF BASFn.DE said costs at sites in its European home market need to be brought to a “permanently” lower level because of a triple burden of sluggish growth, high energy costs and over-regulation.
“These challenging framework conditions in Europe endanger the international competitiveness of European producers and force us to adapt our cost structures as quickly as possible and also permanently,” CEO Martin Brudermueller said in a statement on Wednesday.
In the first nine months of 2022, natural gas costs at BASF’s European sites were about 2.2 billion euros ($2.19 billion) higher than in the year-earlier period, the company added.
As part of an unscheduled release of preliminary third-quarter results two weeks ago, BASF said it would reduce annual costs by 500 million euros in Europe up to 2024, including job cuts, and it also raised the prospect of more structural cutbacks in the region to be announced next year.
Covestro 1COV.DE, a rival maker of chemicals for insulation slabs and upholstery foams, on Tuesday cut its earnings guidance, as soaring gas and raw material prices burden heavy industry players across Europe.
(Reporting by Ludwig Burger, Editing by Miranda Murray)
October 26, 2022
Covestro AG (CVVTF) Q3 2022 Earnings Call Transcript
Oct. 25, 2022 3:13 PM ETCovestro AG (CVVTF), COVTY
Covestro AG (OTCPK:CVVTF) Q3 2022 Earnings Conference Call October 25, 2022 9:00 AM ET
Company Participants
Ronald Koehler – Head, IR
Markus Steilemann – CEO
Thomas Toepfer – CFO
Markus Steilemann
Thank you, Ronald, and good afternoon. A warm welcome also from my side. The turmoil of the energy and raw materials market in combination with weakening demand for our products has affected Covestro in the last quarter. Despite this, Covestro sales in the third quarter 2022 continue to be on the high level of €4.6 billion. In this difficult environment, Covestro has reached an EBITDA of €302 million, still in the targeted range of €300 million to €400 million. The free operating cash flow improved to €33 million after 2 negative quarters.
With only one quarter in front of us, we have narrowed our full year guidance range. In parallel to this call, one of the most influential trade fairs in the plastics industry is slowly starting to wind down. We went out there to craft connections with our customers, suppliers and industry partners and to join forces with the challenges of a quickly changing world.
Let’s turn to the next page. Let us now have a look into volume development. The global volume decreased by 5.7%, mainly driven by the demand weakness in the region, Europe, Middle East and Latin America. The region EMLA has seen significant decreases in almost all industries with only automotive breaking the trend but starting from a low base. Only a slightly decline in volume could be observed in the region, North America. Furniture and electro electronics were down, but this was partly compensated by good development in auto and construction. In Asia Pacific, the volume increased on the back of a stimulus program of the Chinese government for automotive and positive trends in construction.
Looking closer into the different industries, the negative trend in furniture/wood and electro is continuing in all regions. Both industries being affected by a post-COVID decline after a hike during the peak of the coronavirus pandemic. Electronics being hit mostly in Asia Pacific.
The picture is, however, mixed for the construction industry. Whilst volume in Asia Pacific and North America are increasing; the situation in EMEA was negatively — the situation in EMEA was negatively affected by the raw material and energy price situation. The globally positive trend is the volume increase in the automotive industry. Here, the weakness of the electro electronics industry might have had a significant impact on the availability of semiconductors which was the main bottleneck in past quarters.
With this overview of our market environment, let us have a look at the global demand situation across all industries on the next page. If we look at the global demand picture, we can see the same trends that we have outlined in our sales volume overview on the previous slide. We the assumptions in the beginning of 2022, the global GDP has suffered from a dampening caused by the corona lockdown in China, the effect of the Russian invasion into Ukraine and the resulting energy crisis in Europe. We now expect the global GDP to be around 3% with the second half of 2022, clearly below this trend. The forecast for 2022 demand growth in global automotive industry is still above 2021, but the anticipated strong recovery has until now not happened. Also, the positive signs from Q3 can improve the overall picture but not compensate first half production losses, mainly caused by a shortage of semiconductors and the lockdown in China.
Our external data provider, LMC, is now expecting a 7% growth in automotive. The subsection on battery electric vehicles and electric vehicles, that is even more relevant for us, however, is still seeing a high growth rate. The outlook on construction is now also less optimistic and is strongly influenced by the European raw material and energy price situation.
Demand growth 2022 has fallen behind 2021 growth and is expected to be a little higher than 2%. As mentioned earlier, the extremely positive trend for furniture and electro in 2021 has now completely reversed and we see both industries significantly falling behind the expected growth rates. Furniture is definitely a low light with a negative growth expectation of around minus 1%. And for electro, we assume now a growth rate in the range of 1.5%.
With this overview of the global demand picture, I’m now handing over to Thomas who will guide you through the financials.
Markus Steilemann
Thanks a lot, Thomas. And we’re now continuing on Page #13. Coming now to a topic that occupies us almost daily: energy prices and the effect on Covestro as an energy-intensive company. The good news is that despite the peak of the energy price in August, and the still very nervous market, our full year energy bill is now expected to be €2.1 billion, even slightly lower than previously assumed. However, this reduction is driven by the assumption of significantly lower production volumes in the fourth quarter and therefore, less kilowatt hours consumed.
In recent weeks, we have seen a downward gas price trend storages were approaching the maximum and temperatures in Germany were seasonally unusually high. So there was an abundance of gas available. Taking the gas price of October 1 to October 18, flat forward, our energy bill would come out in the range of €2.1 billion. Based on the most recent energy prices, we assume an energy bill of around €600 million for the fourth quarter. Please note that the volatility is still extremely high. Having said this, a range of €550 million to €650 million is built into our guidance.
Charles Webb
Maybe first, just on the mark-to-market. I know it’s just an indication of how you’re looking at next year, and it’s just a point-in-time measure. But when you look at, obviously, end of September versus end of October, where we find ourselves now, I guess quite a lot has changed in terms of energy prices, gas prices as well as some of your product prices in NBI and TDI in different regions, things have moved on. Is there any sense you can give us an indication what it is as of end of October just so we understand that? And also within that mark-to-market, just understanding the I guess, bonus provision assumption that we should be kind of thinking within that or not within that would be super helpful. So just some clarity there.
And then just one on CapEx looking into next year. Can you just help us understand the various building blocks, maintenance as well as some of the bigger growth projects within your kind of €1 billion to €1.1 billion that you have set out for next year in CapEx. Just wondering if there’s any flexibility there given where we find ourselves in the cycle to perhaps reduce spend looking through next year as well.
Thomas Toepfer
Yes. Sorry, this is Thomas. Yes, I mean, let me try to help you a little bit. So I would agree that the September mark-to-market probably is the low point. I would say if you were to push it into October, that number would go slightly up. It would only go slightly up because there is a 4-week delay before the reduced energy prices really hit our P&L. And therefore, I think the energy prices that you see today of whatever below €100 per megawatt hour they will also only come in with some delays.
So I would definitely say that the September number is as far as we can see from today, a low point and things are moving up since then. And in addition to that, it does increase. It does include, as you pointed out, also a bonus provision. So we’ve not assumed bonus to be [indiscernible] of around €100 million to €150 million. You can always ask the question whether it would be paid out or not because you may know our bonus regime, if we don’t earn the cost of capital, there is quite some flexibility to further reduce the bonus and at , I think there’s no discussion that cost of capital would not be earned. So I think those 2 data points may help you to go out where that stands. And as I said, in my view, it’s a low point.
CapEx, you know that we have this maintenance CapEx of roughly €400 million to €450 million. And that means, of course, there is some other projects which are in the middle of the execution, and they are very difficult to stop. For example, the aniline plant in Antwerp and there are some other major CapEx plans where I think stopping or delaying them would cause significant friction costs. But of course, there is some other things which would only be started or could be delayed. So I would definitely say that in the order of magnitude of a couple of hundred million, we do have some flexibility to manage CapEx and we are, of course, currently looking into that number as we prepare for 2023.
Charles Webb
That’s really helpful. That’s really helpful. I’ll squeeze one more in. Could you share what could be in terms of the MDI landscape in terms of supply and demand, a lot of your competitors talking about restructuring European MDI businesses and capacity. I presume chlorine and the energy price has been a bit of an issue there. But just understanding what you’re seeing on the supply/demand side for MDI in Europe today.
Markus Steilemann
Charlie, this is Markus speaking. Maybe from my side, we have learned at least from, let’s say, publicly available sources that, for example, Huntsman is discussing it. We also see that there is at current point in time, plenty of supply in Europe available. And we, in this context, try to raise prices, but there is some if not some difficulty to put it mildly out there. So long story short, it remains to be seen where midterm, the energy prices are going because we have witnessed that in other industries for numerous reasons, take the polycarbonates, I mean the base polycarbonate industry a couple of years ago, where, let’s say, on very short notice, many competitors were out there and saying, I’m shutting down here, I’m shutting down there. And now we have similar, let’s say, quite short term, let’s say, drastic reactions with one or the other public statements.
And over time, when things are panning out, you saw that many of those announcement to shut down plants have either never been executed or have been executed at a significant delay. And when we thought where the plants will remain on stream, all of a sudden, they were closed. Just to name one example, the Singapore [indiscernible] operations of polycarbonate. So long story short, the normalized view, let’s say, when we are through this turmoil, it is pretty clear that the capacity of European production assets is needed and that there is also plenty of demand that will be also in the future being sourced from Europe. And one key reason for that is the, let’s say, disrupted supply chains which in the last 1.5 to 2 years have taught many market players a significant lesson.
So if we just oversimplify it and say, well, because of, for example, landed cost from Asia Pacific or the United States or European assets will be in competitive. I do not believe that this is, let’s say, the main reason. There’s other reasons, for example, the geopolitical turmoil, the overall development that we currently see with regard to, may I call it, new world order developing that might also bring back a lot of assets into competitiveness again.
And let’s not forget, we have a lot of, let’s say, regional nature of those supply chains. So long story short, no matter what you currently read and no matter, let’s say, how short term the reactions are, I tempt to say that some of those reactions are a little bit of an overreaction. And under normalized conditions, we will also see that European assets and particularly, MDI assets will be back on track and will be also sought after by European customers of MDI.
Christian Faitz
A couple of questions, please. First of all, speaking of MDI, Markus, would there any update on the decision for your MDI project in Texas or China? Because I believe you wanted to communicate that during Q4?
Second question, I understand the mark-to-market on the cost side. But would you mind sharing your volume assumptions [indiscernible] potential recession assumptions for your mark-to-market €900 million EBITDA for 2023.
Markus Steilemann
Yes, Christian, good to hear again. And still remember, let’s say your visit on last week, much appreciated. Christian, on MDI, the short answer would be no update these days because as we announced already in earlier, let’s say, interaction opportunities. We are still thoroughly investigating, let’s say, that investment, and we will come up with a decision in the fourth quarter, but not today, not now.
So please bear with me that here, we still take some time to really take a detailed, thorough assessment of the overall situation of the overall, let’s say, investment and also of the overall, let’s say, framework conditions.
On the mark-to-market, the assumptions we have taken, and Thomas alluded to that, the September margins flat forward the planned volumes flat forward as an assumption for 2023 and also then the planned costs that we take into consideration in the first attempt for 2023. So this is how we came to the mark-to-market based on September margins. So with particular regard to your volume assumptions, we assume that volumes will be relatively flat compared to the 2022 expected volumes.
Thomas Toepfer
This is Thomas. Just if you want to play around with that assumption be aware that the volume sensitivity, of course, is much lower in 2023 than in a normal year. The numbers we usually state that there is some €60 million to €70 million. I think for next year, I would rather expect a volume sensitivity between €20 million to €30 million per 1 percentage point of growth. And therefore, I think that’s also important to keep in mind if you want to play around with that assumption.
aideep Pandya
Yes. The first question is really around your energy and gas bill. So you’ve given us the volume number for usage of last year because you’re running such lower utilization in MDI, and TDI has been off-line. What is the actual energy usage for 2022? And then if you were to just use spot prices for 2022, current prices are the — what sort of would be the energy bill for next year? That’s my first question.
The second question is really around what you see with regards to the Polyurethanes landscape in Europe. I mean, at what point do you think that the customers are going to panic because in TDI, we have seen a very sharp reaction with [indiscernible] surprises in China, but we haven’t seen that with MDI. So what explains in your opinion, this difference in reaction?
And then the final question really is just around polycarbonate. Do you see energy prices as well as raw material unavailability or availability, having an impact on polycarbonate supply chain also in Europe because there have been a couple of announcements here and there? So what do you see with regards to polycarbonate spreads and profitability?
Markus Steilemann
Okay. Jaideep, this is Markus speaking. So let me just start with the last question maybe on the European polycarbonate situation. And let me also put it into context about, let’s say, some of the other questions that you have asked.
If you compare our 3 large volume products in the portfolio, TDI, MDI as well as polycarbonates. And if you put the overall energy demand of the products for TDI at 100 so to say. Polycarbonate only consumes about, let’s say, 1/3 because the energy intensity is much lower compared to TDI. And MDI is somewhere in the middle.
Just to give you an idea which product group is hit the most by the current overall, let’s say, energy bill increases and gas price increases. What does that mean? We have seen still some temporary closures of some European assets in polycarbonates. The main reason is that there’s numerous technologies out there and some technologies are simply no longer cost competitive despite the fact that there are not so much energy like, for example, TDI. We feel in this context, very well positioned with our polycarbonate plants given size, economy of scale as well as the opportunity, therefore, to, let’s say, continue to produce also in a very challenging conditions.
So that’s why — we also did not face any, let’s say, raw material availability issues with regards to what we need to produce polycarbonate, but also as we produce quite a bit for captive use in our own, let’s say further compounding, let’s say, planned for our engineered plastics businesses. We also did not face any raw material shortages in that regard. There have been smaller, let’s say, shortages with regard to some additives that we could so far always find second or third supplier options and did not, let’s say, have significant, let’s say, loss of business due to some of those smaller additives. So that is hopefully quite comprehensive picture about how we look at the polycarbonate situation.
Let’s talk a little bit on question number 2. And here is a significant difference in terms of asset size and individual plant size compared to total market size. So TDI in Europe is down. In that sense, 2 major production sites are down with 600,000 tons. And those 600,000 tons is just represented by 2 major world-scale plants, one in Ludwigshafen, 1, let’s say, in Dormagen, that is our plant. And this is 600,000 tons out of 700,000 that means, like-for-like, you have taken out more than 80% of European production capacity.
Having this in mind, even demand was significantly down for TDI, 85% of, let’s say, supply shortage after a couple of weeks has led to the situation that you can currently observe that customers simply saying, wait a moment, I need TDI. I have out of my inventories and looked through my inventories. And now I need to buy [indiscernible] sudden recognizing that 85% of capacity is out in Europe. And at the same time, you see that there have been lots of export from Asia Pacific arrive in Europe, but also here, there is due to logistics reasons and other reasons, and also capacity restraints in — constraints in Asia Pacific and the U.S. because we’re talking about global capacity in total, simply not sufficient TDI. And that all of a sudden then as usual with such a, let’s say, highly volatile product has led to this significant reaction of our customers.
For MDI and now comparing to TDI, the situation is different because we maybe see around 5% to 10% of curtailments only. That is given the market size compared to total plant size, plus a little bit more flexibility on how you steer an MDI plant. That means you could much more adjust in more, let’s say, smaller doses to the market demand as well as to potential supply issues. And that is why you have not yet seen similar strong reactions of TDI compared to MDI. So that’s, let’s say, from polycarbonate, MDI, TDI and for the energy topic.
If you don’t mind, I would like to hand back to Thomas.
Thomas Toepfer
Jaideep, this is Thomas. So I hope that I got your question correctly because there was a little bit of a background noise in the line. So I would say, if you assume volumes going up or down, you can essentially assume that our energy consumption goes up and down with the same percentage unless you would assume that the product mix changes, Markus has just alluded that TDI has a much higher energy intensity. But if you were to take the same mix, essentially is very proportionate. And second, your question was what would be the energy cost with the prices as of today? I can only give you a rough indication, if you look at Page 13 of the presentation, we will be somewhere between the €623 million per quarter that we had in Q3 and the €450 million that we had in Q2. So let’s give or take, it will be a €300 million saving per year relative to where we stand in 2022 with the same amount of volume. So I think as a rough indication, this would be the number that I can give you.
Chetan Udeshi
Yes. Thanks. I was just coming back to the mark-to-market number, and thanks for providing it. I’m just curious, why did you decide to give us like 2023 mark-to-market, so early in the — let’s say, so far before we actually talk about 2023 outlook, which will be more in February. Are you trying to sort of steer off to that sort of numbers, closer to €1 billion rather than €1.6 billion? I think I’m just curious why talk about 2023 so far ahead of time, let’s put it this way.
And second question, Markus, it’s more related to your point on TDI, big capacity curtailment. What’s stopping that on the MDI side you think? Is it more the fact that there are more players? So maybe the market is not as, let’s say, consolidated in nature, and hence, you don’t see the same sort of response so far on the MDI side because though MDI might be steering better than TDI, it doesn’t feel like any of the European MDI producers are really earning cost of capital at least not in Q3 based on the high energy costs.
And last question is, can you confirm between Europe as a whole, did Covestro had breakeven EBITDA in Q3? Or was this below breakeven?
Thomas Toepfer
So Chetan, let me start with your first question, the mark-to-market. You know what, there was no particular thought behind it or any guidance or anything if we wanted to scare somebody away, it’s just that I think it’s a good tradition that we have that in Q3 as a technical indication, we give you the mark-to-market for the following year because mark-to-market for the current year for the last, let’s say, 2.5 months would not make a lot of sense. And therefore, I think there was no particular thought behind it other than we’ve always done it and people gave us the feedback that they find it helpful.
Of course, it does show that the consensus for 2023 still has I mean, I would say some ambition, which we think can be achieved if the economy is turning. But of course, that the assumption must be that you cannot put for quarters in a row and then achieve the current consensus. So I think it just gives you a little bit of guide rail to judge what has to happen in order to make — to give you the 2023 result. I think that’s all.
And then, okay, maybe actually we have an EBITDA question. Q3 EBITDA for Europe, I think not surprisingly, was not breakeven. We were loss-making with respect to our EBITDA numbers in Europe.
Markus Steilemann
Chetan, this is Markus. Thanks for your question. And as you [indiscernible] addressed it as a kind of a follow-up to my previous statement. The numerous factors for TDI being different. We have a similar, let’s say, consolidated market structure in terms of the suppliers. That’s not too much different from MDI, but what is particularly different is 2 reasons. Number 1 is TDI, I have alluded to is much higher energy intensive than MDI. And number 2 is the respective TDI players have much fewer plants in total, and each plant is representing a much higher share of the total market.
And those 2 factors together, that means the high energy consumption as well as the even higher concentration within an anyhow consolidated market has a much stronger impact with 1 plant, so to say, it’s not an operation between 8% and 10%, assuming a world-scale plant between 8% and 10% of the global market is out. So — and that’s why those 2 plants that were out in Europe represented 80% to 85% of the European market and almost 20% of the global market. And you cannot just easily it because it needs to run at around 50% plus output rate.
So you don’t have the decision like an MDI more or less with the overall, let’s say, a number of plants being out there that an individual competitor can say, okay, we run on 1 line, 2 lines or 3 lines. And in that particular context, therefore, not so many plants have been taken out or capacity. And at the same time, you have much higher flexibility to steer, let’s say, and being therefore also a little bit closer to market demand. So it’s not a jumping of capacity in or out, but no more gradual adjustment.
And last but not least, I think what is important, the TDI plant of us in Denmark and in Germany was out not due to, let’s say, cost reasons in the first place, but due to force majeure in the upstream value chain for chlorine production because the chlorine production was out due to a technical issue. And that technical issue has led to a TDI plant shutdown. So that’s the situation.
Geoffrey Haire
I just wanted to ask a question around impairments of assets. I’m not in the . So this may be a fairly simplistic question. I just wonder at what point, given the closures you’ve got in TDI and obviously running MDI at lower capacity utilization, will you have to consider empowering some of the assets.
Thomas Toepfer
I think, Geoff, I mean, very simple. We follow the rules of IFRS here. Clearly, the current economic environment is a triggering event to have a look at our values in terms of goodwill, but also in terms of asset values. I think it’s — it shouldn’t be a surprise or you know that some of our are at the brink of such a test. We have also, in the last annual report noted that [indiscernible] with a 10% sensitivity would run into a need for impairment. And therefore, I think with that indication, will be running into that test. And I would clearly not exclude that it will lead to an impairment need, which I think in a crisis is, in general, not a surprise.
Thomas Swoboda
Yes. Sorry for the technical issue. I will still try 2 quick questions. Benzene costs were very high in Q3. I remember we discussed that broadly in the call. My question is, was that a bigger headwind in Q3? And is this already digested or is it going to bug you in Q4?
And very quickly on TDI. I mean we have been recurrently hearing from you and from your peers that MDI and TDI do not travel that well. Apparently, you are serving your clients from other plants importing into Europe. I mean how long are you comfortable doing that? Is this just a short-term fix? Or is it something that could last for longer?
Markus Steilemann
Yes. Thomas, [indiscernible] benzene has seen quite some peaks. You’re absolutely right. Currently, we are talking about benzene prices of about €900 per ton. The peak, just in comparison, has been at €1,700 plus. And we believe that we could mainly digested this in the third quarter, but it will also last a little bit into the fourth quarter because we’re still selling off inventories that have been produced, let’s say, with those higher costs. So long story short, it takes due to the slightly subdued demand, in particular in Europe some time to adjust those costs.
And on the second question. Yes, once again, these are the most complex questions. You’re right, on the one hand, MDI and TDI are not traveling very well. That’s true. And that’s why, in particular, on MDI, you see only a part of the market segments being supplied with imported MDI simply where activity after long transportation is still acceptable for the particular application of the customer. So that means serving an MDI market from outside Europe, given all the complexities, import, cooling and so on and so forth. As I said earlier, it will be difficult in the mid to long run. That’s number one. And even in the short term to further increase MDI import into Europe is a challenge because as we see with TDI, there’s simply not sufficient capacity available to cover up for the entire European overall production capacity. So that’s number one.
TDI, same topic. We’re just currently seeing from recent price developments, in particular in China going through the roof. That also this, let’s say, rather — that this is a rather short-term solution because once TDI prices are back to a level where it pays off to restart European TDI plants, they will be restarted. And so — and that’s why I do not think that there will be let’s say, a mid to long-term opportunity to really continue to supply from the outside world.
And once again, let me reiterate one other topic. This is a market where you supply in the region for the region. We have seen no geopolitical disruptions currently going on and manifesting itself. And we have seen over the last 2.5 to 3 years, significant supply chain disruptions. So many customers are concerned about being able to only bank on long-distance imported goods and that’s why I believe next to all, let’s say, the spreadsheet calculations that might lead to different assumptions, I truly believe that there will be demand for European-based TDI production, there will be demand for European-based MDI production as well as respective consumptions.
https://seekingalpha.com/article/4549011-covestro-ag-cvvtf-q3-2022-earnings-call-transcript
October 26, 2022
Covestro AG (CVVTF) Q3 2022 Earnings Call Transcript
Oct. 25, 2022 3:13 PM ETCovestro AG (CVVTF), COVTY
Covestro AG (OTCPK:CVVTF) Q3 2022 Earnings Conference Call October 25, 2022 9:00 AM ET
Company Participants
Ronald Koehler – Head, IR
Markus Steilemann – CEO
Thomas Toepfer – CFO
Markus Steilemann
Thank you, Ronald, and good afternoon. A warm welcome also from my side. The turmoil of the energy and raw materials market in combination with weakening demand for our products has affected Covestro in the last quarter. Despite this, Covestro sales in the third quarter 2022 continue to be on the high level of €4.6 billion. In this difficult environment, Covestro has reached an EBITDA of €302 million, still in the targeted range of €300 million to €400 million. The free operating cash flow improved to €33 million after 2 negative quarters.
With only one quarter in front of us, we have narrowed our full year guidance range. In parallel to this call, one of the most influential trade fairs in the plastics industry is slowly starting to wind down. We went out there to craft connections with our customers, suppliers and industry partners and to join forces with the challenges of a quickly changing world.
Let’s turn to the next page. Let us now have a look into volume development. The global volume decreased by 5.7%, mainly driven by the demand weakness in the region, Europe, Middle East and Latin America. The region EMLA has seen significant decreases in almost all industries with only automotive breaking the trend but starting from a low base. Only a slightly decline in volume could be observed in the region, North America. Furniture and electro electronics were down, but this was partly compensated by good development in auto and construction. In Asia Pacific, the volume increased on the back of a stimulus program of the Chinese government for automotive and positive trends in construction.
Looking closer into the different industries, the negative trend in furniture/wood and electro is continuing in all regions. Both industries being affected by a post-COVID decline after a hike during the peak of the coronavirus pandemic. Electronics being hit mostly in Asia Pacific.
The picture is, however, mixed for the construction industry. Whilst volume in Asia Pacific and North America are increasing; the situation in EMEA was negatively — the situation in EMEA was negatively affected by the raw material and energy price situation. The globally positive trend is the volume increase in the automotive industry. Here, the weakness of the electro electronics industry might have had a significant impact on the availability of semiconductors which was the main bottleneck in past quarters.
With this overview of our market environment, let us have a look at the global demand situation across all industries on the next page. If we look at the global demand picture, we can see the same trends that we have outlined in our sales volume overview on the previous slide. We the assumptions in the beginning of 2022, the global GDP has suffered from a dampening caused by the corona lockdown in China, the effect of the Russian invasion into Ukraine and the resulting energy crisis in Europe. We now expect the global GDP to be around 3% with the second half of 2022, clearly below this trend. The forecast for 2022 demand growth in global automotive industry is still above 2021, but the anticipated strong recovery has until now not happened. Also, the positive signs from Q3 can improve the overall picture but not compensate first half production losses, mainly caused by a shortage of semiconductors and the lockdown in China.
Our external data provider, LMC, is now expecting a 7% growth in automotive. The subsection on battery electric vehicles and electric vehicles, that is even more relevant for us, however, is still seeing a high growth rate. The outlook on construction is now also less optimistic and is strongly influenced by the European raw material and energy price situation.
Demand growth 2022 has fallen behind 2021 growth and is expected to be a little higher than 2%. As mentioned earlier, the extremely positive trend for furniture and electro in 2021 has now completely reversed and we see both industries significantly falling behind the expected growth rates. Furniture is definitely a low light with a negative growth expectation of around minus 1%. And for electro, we assume now a growth rate in the range of 1.5%.
With this overview of the global demand picture, I’m now handing over to Thomas who will guide you through the financials.
Markus Steilemann
Thanks a lot, Thomas. And we’re now continuing on Page #13. Coming now to a topic that occupies us almost daily: energy prices and the effect on Covestro as an energy-intensive company. The good news is that despite the peak of the energy price in August, and the still very nervous market, our full year energy bill is now expected to be €2.1 billion, even slightly lower than previously assumed. However, this reduction is driven by the assumption of significantly lower production volumes in the fourth quarter and therefore, less kilowatt hours consumed.
In recent weeks, we have seen a downward gas price trend storages were approaching the maximum and temperatures in Germany were seasonally unusually high. So there was an abundance of gas available. Taking the gas price of October 1 to October 18, flat forward, our energy bill would come out in the range of €2.1 billion. Based on the most recent energy prices, we assume an energy bill of around €600 million for the fourth quarter. Please note that the volatility is still extremely high. Having said this, a range of €550 million to €650 million is built into our guidance.
Charles Webb
Maybe first, just on the mark-to-market. I know it’s just an indication of how you’re looking at next year, and it’s just a point-in-time measure. But when you look at, obviously, end of September versus end of October, where we find ourselves now, I guess quite a lot has changed in terms of energy prices, gas prices as well as some of your product prices in NBI and TDI in different regions, things have moved on. Is there any sense you can give us an indication what it is as of end of October just so we understand that? And also within that mark-to-market, just understanding the I guess, bonus provision assumption that we should be kind of thinking within that or not within that would be super helpful. So just some clarity there.
And then just one on CapEx looking into next year. Can you just help us understand the various building blocks, maintenance as well as some of the bigger growth projects within your kind of €1 billion to €1.1 billion that you have set out for next year in CapEx. Just wondering if there’s any flexibility there given where we find ourselves in the cycle to perhaps reduce spend looking through next year as well.
Thomas Toepfer
Yes. Sorry, this is Thomas. Yes, I mean, let me try to help you a little bit. So I would agree that the September mark-to-market probably is the low point. I would say if you were to push it into October, that number would go slightly up. It would only go slightly up because there is a 4-week delay before the reduced energy prices really hit our P&L. And therefore, I think the energy prices that you see today of whatever below €100 per megawatt hour they will also only come in with some delays.
So I would definitely say that the September number is as far as we can see from today, a low point and things are moving up since then. And in addition to that, it does increase. It does include, as you pointed out, also a bonus provision. So we’ve not assumed bonus to be [indiscernible] of around €100 million to €150 million. You can always ask the question whether it would be paid out or not because you may know our bonus regime, if we don’t earn the cost of capital, there is quite some flexibility to further reduce the bonus and at , I think there’s no discussion that cost of capital would not be earned. So I think those 2 data points may help you to go out where that stands. And as I said, in my view, it’s a low point.
CapEx, you know that we have this maintenance CapEx of roughly €400 million to €450 million. And that means, of course, there is some other projects which are in the middle of the execution, and they are very difficult to stop. For example, the aniline plant in Antwerp and there are some other major CapEx plans where I think stopping or delaying them would cause significant friction costs. But of course, there is some other things which would only be started or could be delayed. So I would definitely say that in the order of magnitude of a couple of hundred million, we do have some flexibility to manage CapEx and we are, of course, currently looking into that number as we prepare for 2023.
Charles Webb
That’s really helpful. That’s really helpful. I’ll squeeze one more in. Could you share what could be in terms of the MDI landscape in terms of supply and demand, a lot of your competitors talking about restructuring European MDI businesses and capacity. I presume chlorine and the energy price has been a bit of an issue there. But just understanding what you’re seeing on the supply/demand side for MDI in Europe today.
Markus Steilemann
Charlie, this is Markus speaking. Maybe from my side, we have learned at least from, let’s say, publicly available sources that, for example, Huntsman is discussing it. We also see that there is at current point in time, plenty of supply in Europe available. And we, in this context, try to raise prices, but there is some if not some difficulty to put it mildly out there. So long story short, it remains to be seen where midterm, the energy prices are going because we have witnessed that in other industries for numerous reasons, take the polycarbonates, I mean the base polycarbonate industry a couple of years ago, where, let’s say, on very short notice, many competitors were out there and saying, I’m shutting down here, I’m shutting down there. And now we have similar, let’s say, quite short term, let’s say, drastic reactions with one or the other public statements.
And over time, when things are panning out, you saw that many of those announcement to shut down plants have either never been executed or have been executed at a significant delay. And when we thought where the plants will remain on stream, all of a sudden, they were closed. Just to name one example, the Singapore [indiscernible] operations of polycarbonate. So long story short, the normalized view, let’s say, when we are through this turmoil, it is pretty clear that the capacity of European production assets is needed and that there is also plenty of demand that will be also in the future being sourced from Europe. And one key reason for that is the, let’s say, disrupted supply chains which in the last 1.5 to 2 years have taught many market players a significant lesson.
So if we just oversimplify it and say, well, because of, for example, landed cost from Asia Pacific or the United States or European assets will be in competitive. I do not believe that this is, let’s say, the main reason. There’s other reasons, for example, the geopolitical turmoil, the overall development that we currently see with regard to, may I call it, new world order developing that might also bring back a lot of assets into competitiveness again.
And let’s not forget, we have a lot of, let’s say, regional nature of those supply chains. So long story short, no matter what you currently read and no matter, let’s say, how short term the reactions are, I tempt to say that some of those reactions are a little bit of an overreaction. And under normalized conditions, we will also see that European assets and particularly, MDI assets will be back on track and will be also sought after by European customers of MDI.
Christian Faitz
A couple of questions, please. First of all, speaking of MDI, Markus, would there any update on the decision for your MDI project in Texas or China? Because I believe you wanted to communicate that during Q4?
Second question, I understand the mark-to-market on the cost side. But would you mind sharing your volume assumptions [indiscernible] potential recession assumptions for your mark-to-market €900 million EBITDA for 2023.
Markus Steilemann
Yes, Christian, good to hear again. And still remember, let’s say your visit on last week, much appreciated. Christian, on MDI, the short answer would be no update these days because as we announced already in earlier, let’s say, interaction opportunities. We are still thoroughly investigating, let’s say, that investment, and we will come up with a decision in the fourth quarter, but not today, not now.
So please bear with me that here, we still take some time to really take a detailed, thorough assessment of the overall situation of the overall, let’s say, investment and also of the overall, let’s say, framework conditions.
On the mark-to-market, the assumptions we have taken, and Thomas alluded to that, the September margins flat forward the planned volumes flat forward as an assumption for 2023 and also then the planned costs that we take into consideration in the first attempt for 2023. So this is how we came to the mark-to-market based on September margins. So with particular regard to your volume assumptions, we assume that volumes will be relatively flat compared to the 2022 expected volumes.
Thomas Toepfer
This is Thomas. Just if you want to play around with that assumption be aware that the volume sensitivity, of course, is much lower in 2023 than in a normal year. The numbers we usually state that there is some €60 million to €70 million. I think for next year, I would rather expect a volume sensitivity between €20 million to €30 million per 1 percentage point of growth. And therefore, I think that’s also important to keep in mind if you want to play around with that assumption.
aideep Pandya
Yes. The first question is really around your energy and gas bill. So you’ve given us the volume number for usage of last year because you’re running such lower utilization in MDI, and TDI has been off-line. What is the actual energy usage for 2022? And then if you were to just use spot prices for 2022, current prices are the — what sort of would be the energy bill for next year? That’s my first question.
The second question is really around what you see with regards to the Polyurethanes landscape in Europe. I mean, at what point do you think that the customers are going to panic because in TDI, we have seen a very sharp reaction with [indiscernible] surprises in China, but we haven’t seen that with MDI. So what explains in your opinion, this difference in reaction?
And then the final question really is just around polycarbonate. Do you see energy prices as well as raw material unavailability or availability, having an impact on polycarbonate supply chain also in Europe because there have been a couple of announcements here and there? So what do you see with regards to polycarbonate spreads and profitability?
Markus Steilemann
Okay. Jaideep, this is Markus speaking. So let me just start with the last question maybe on the European polycarbonate situation. And let me also put it into context about, let’s say, some of the other questions that you have asked.
If you compare our 3 large volume products in the portfolio, TDI, MDI as well as polycarbonates. And if you put the overall energy demand of the products for TDI at 100 so to say. Polycarbonate only consumes about, let’s say, 1/3 because the energy intensity is much lower compared to TDI. And MDI is somewhere in the middle.
Just to give you an idea which product group is hit the most by the current overall, let’s say, energy bill increases and gas price increases. What does that mean? We have seen still some temporary closures of some European assets in polycarbonates. The main reason is that there’s numerous technologies out there and some technologies are simply no longer cost competitive despite the fact that there are not so much energy like, for example, TDI. We feel in this context, very well positioned with our polycarbonate plants given size, economy of scale as well as the opportunity, therefore, to, let’s say, continue to produce also in a very challenging conditions.
So that’s why — we also did not face any, let’s say, raw material availability issues with regards to what we need to produce polycarbonate, but also as we produce quite a bit for captive use in our own, let’s say further compounding, let’s say, planned for our engineered plastics businesses. We also did not face any raw material shortages in that regard. There have been smaller, let’s say, shortages with regard to some additives that we could so far always find second or third supplier options and did not, let’s say, have significant, let’s say, loss of business due to some of those smaller additives. So that is hopefully quite comprehensive picture about how we look at the polycarbonate situation.
Let’s talk a little bit on question number 2. And here is a significant difference in terms of asset size and individual plant size compared to total market size. So TDI in Europe is down. In that sense, 2 major production sites are down with 600,000 tons. And those 600,000 tons is just represented by 2 major world-scale plants, one in Ludwigshafen, 1, let’s say, in Dormagen, that is our plant. And this is 600,000 tons out of 700,000 that means, like-for-like, you have taken out more than 80% of European production capacity.
Having this in mind, even demand was significantly down for TDI, 85% of, let’s say, supply shortage after a couple of weeks has led to the situation that you can currently observe that customers simply saying, wait a moment, I need TDI. I have out of my inventories and looked through my inventories. And now I need to buy [indiscernible] sudden recognizing that 85% of capacity is out in Europe. And at the same time, you see that there have been lots of export from Asia Pacific arrive in Europe, but also here, there is due to logistics reasons and other reasons, and also capacity restraints in — constraints in Asia Pacific and the U.S. because we’re talking about global capacity in total, simply not sufficient TDI. And that all of a sudden then as usual with such a, let’s say, highly volatile product has led to this significant reaction of our customers.
For MDI and now comparing to TDI, the situation is different because we maybe see around 5% to 10% of curtailments only. That is given the market size compared to total plant size, plus a little bit more flexibility on how you steer an MDI plant. That means you could much more adjust in more, let’s say, smaller doses to the market demand as well as to potential supply issues. And that is why you have not yet seen similar strong reactions of TDI compared to MDI. So that’s, let’s say, from polycarbonate, MDI, TDI and for the energy topic.
If you don’t mind, I would like to hand back to Thomas.
Thomas Toepfer
Jaideep, this is Thomas. So I hope that I got your question correctly because there was a little bit of a background noise in the line. So I would say, if you assume volumes going up or down, you can essentially assume that our energy consumption goes up and down with the same percentage unless you would assume that the product mix changes, Markus has just alluded that TDI has a much higher energy intensity. But if you were to take the same mix, essentially is very proportionate. And second, your question was what would be the energy cost with the prices as of today? I can only give you a rough indication, if you look at Page 13 of the presentation, we will be somewhere between the €623 million per quarter that we had in Q3 and the €450 million that we had in Q2. So let’s give or take, it will be a €300 million saving per year relative to where we stand in 2022 with the same amount of volume. So I think as a rough indication, this would be the number that I can give you.
Chetan Udeshi
Yes. Thanks. I was just coming back to the mark-to-market number, and thanks for providing it. I’m just curious, why did you decide to give us like 2023 mark-to-market, so early in the — let’s say, so far before we actually talk about 2023 outlook, which will be more in February. Are you trying to sort of steer off to that sort of numbers, closer to €1 billion rather than €1.6 billion? I think I’m just curious why talk about 2023 so far ahead of time, let’s put it this way.
And second question, Markus, it’s more related to your point on TDI, big capacity curtailment. What’s stopping that on the MDI side you think? Is it more the fact that there are more players? So maybe the market is not as, let’s say, consolidated in nature, and hence, you don’t see the same sort of response so far on the MDI side because though MDI might be steering better than TDI, it doesn’t feel like any of the European MDI producers are really earning cost of capital at least not in Q3 based on the high energy costs.
And last question is, can you confirm between Europe as a whole, did Covestro had breakeven EBITDA in Q3? Or was this below breakeven?
Thomas Toepfer
So Chetan, let me start with your first question, the mark-to-market. You know what, there was no particular thought behind it or any guidance or anything if we wanted to scare somebody away, it’s just that I think it’s a good tradition that we have that in Q3 as a technical indication, we give you the mark-to-market for the following year because mark-to-market for the current year for the last, let’s say, 2.5 months would not make a lot of sense. And therefore, I think there was no particular thought behind it other than we’ve always done it and people gave us the feedback that they find it helpful.
Of course, it does show that the consensus for 2023 still has I mean, I would say some ambition, which we think can be achieved if the economy is turning. But of course, that the assumption must be that you cannot put for quarters in a row and then achieve the current consensus. So I think it just gives you a little bit of guide rail to judge what has to happen in order to make — to give you the 2023 result. I think that’s all.
And then, okay, maybe actually we have an EBITDA question. Q3 EBITDA for Europe, I think not surprisingly, was not breakeven. We were loss-making with respect to our EBITDA numbers in Europe.
Markus Steilemann
Chetan, this is Markus. Thanks for your question. And as you [indiscernible] addressed it as a kind of a follow-up to my previous statement. The numerous factors for TDI being different. We have a similar, let’s say, consolidated market structure in terms of the suppliers. That’s not too much different from MDI, but what is particularly different is 2 reasons. Number 1 is TDI, I have alluded to is much higher energy intensive than MDI. And number 2 is the respective TDI players have much fewer plants in total, and each plant is representing a much higher share of the total market.
And those 2 factors together, that means the high energy consumption as well as the even higher concentration within an anyhow consolidated market has a much stronger impact with 1 plant, so to say, it’s not an operation between 8% and 10%, assuming a world-scale plant between 8% and 10% of the global market is out. So — and that’s why those 2 plants that were out in Europe represented 80% to 85% of the European market and almost 20% of the global market. And you cannot just easily it because it needs to run at around 50% plus output rate.
So you don’t have the decision like an MDI more or less with the overall, let’s say, a number of plants being out there that an individual competitor can say, okay, we run on 1 line, 2 lines or 3 lines. And in that particular context, therefore, not so many plants have been taken out or capacity. And at the same time, you have much higher flexibility to steer, let’s say, and being therefore also a little bit closer to market demand. So it’s not a jumping of capacity in or out, but no more gradual adjustment.
And last but not least, I think what is important, the TDI plant of us in Denmark and in Germany was out not due to, let’s say, cost reasons in the first place, but due to force majeure in the upstream value chain for chlorine production because the chlorine production was out due to a technical issue. And that technical issue has led to a TDI plant shutdown. So that’s the situation.
Geoffrey Haire
I just wanted to ask a question around impairments of assets. I’m not in the . So this may be a fairly simplistic question. I just wonder at what point, given the closures you’ve got in TDI and obviously running MDI at lower capacity utilization, will you have to consider empowering some of the assets.
Thomas Toepfer
I think, Geoff, I mean, very simple. We follow the rules of IFRS here. Clearly, the current economic environment is a triggering event to have a look at our values in terms of goodwill, but also in terms of asset values. I think it’s — it shouldn’t be a surprise or you know that some of our are at the brink of such a test. We have also, in the last annual report noted that [indiscernible] with a 10% sensitivity would run into a need for impairment. And therefore, I think with that indication, will be running into that test. And I would clearly not exclude that it will lead to an impairment need, which I think in a crisis is, in general, not a surprise.
Thomas Swoboda
Yes. Sorry for the technical issue. I will still try 2 quick questions. Benzene costs were very high in Q3. I remember we discussed that broadly in the call. My question is, was that a bigger headwind in Q3? And is this already digested or is it going to bug you in Q4?
And very quickly on TDI. I mean we have been recurrently hearing from you and from your peers that MDI and TDI do not travel that well. Apparently, you are serving your clients from other plants importing into Europe. I mean how long are you comfortable doing that? Is this just a short-term fix? Or is it something that could last for longer?
Markus Steilemann
Yes. Thomas, [indiscernible] benzene has seen quite some peaks. You’re absolutely right. Currently, we are talking about benzene prices of about €900 per ton. The peak, just in comparison, has been at €1,700 plus. And we believe that we could mainly digested this in the third quarter, but it will also last a little bit into the fourth quarter because we’re still selling off inventories that have been produced, let’s say, with those higher costs. So long story short, it takes due to the slightly subdued demand, in particular in Europe some time to adjust those costs.
And on the second question. Yes, once again, these are the most complex questions. You’re right, on the one hand, MDI and TDI are not traveling very well. That’s true. And that’s why, in particular, on MDI, you see only a part of the market segments being supplied with imported MDI simply where activity after long transportation is still acceptable for the particular application of the customer. So that means serving an MDI market from outside Europe, given all the complexities, import, cooling and so on and so forth. As I said earlier, it will be difficult in the mid to long run. That’s number one. And even in the short term to further increase MDI import into Europe is a challenge because as we see with TDI, there’s simply not sufficient capacity available to cover up for the entire European overall production capacity. So that’s number one.
TDI, same topic. We’re just currently seeing from recent price developments, in particular in China going through the roof. That also this, let’s say, rather — that this is a rather short-term solution because once TDI prices are back to a level where it pays off to restart European TDI plants, they will be restarted. And so — and that’s why I do not think that there will be let’s say, a mid to long-term opportunity to really continue to supply from the outside world.
And once again, let me reiterate one other topic. This is a market where you supply in the region for the region. We have seen no geopolitical disruptions currently going on and manifesting itself. And we have seen over the last 2.5 to 3 years, significant supply chain disruptions. So many customers are concerned about being able to only bank on long-distance imported goods and that’s why I believe next to all, let’s say, the spreadsheet calculations that might lead to different assumptions, I truly believe that there will be demand for European-based TDI production, there will be demand for European-based MDI production as well as respective consumptions.
https://seekingalpha.com/article/4549011-covestro-ag-cvvtf-q3-2022-earnings-call-transcript
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