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Covestro Interview

June 16, 2022

High energy prices to boost sustainability megatrend – Covestro CFO

Joseph Chang

24-May-2022Full storyRelated newsRelated contentContact us SHARE THIS

NEW YORK (ICIS)–Germany-based Covestro sees higher oil and gas prices driving not only the energy transition to electric vehicles (EVs) and renewable power but also greater use of insulation to enhance energy efficiency, making it well positioned to capitalise on these trends, its chief financial officer (CFO) said.

“Energy prices going up in the mid-to-long term is a positive for us as energy efficiency programmes become more important. MDI [methylene diphenyl diisocyanate] is the best insulation used in refrigerators and buildings, and EVs use 3-5 times more polycarbonate (PC) versus traditional cars,” said Covestro CFO Thomas Toepfer in an interview with ICIS in New York.

Covestro also produces polyurethane coatings and composites for wind turbine blades to make them lower cost and more durable, he noted.

“If we can increase the lifetime of an offshore wind turbine by 2-3 years, there is a huge difference in investment returns,” said Toepfer.

PC is used in EV battery packaging systems for thermal management as well as electric powertrain parts and other light-weighting applications.

“The move to renewable energy, EVs and energy efficiency is helpful because we provide the products that enable this transition. It is a growth multiplier for our business,” said Toepfer.

Covestro, like all chemicals producers in Europe, is experiencing higher energy and raw materials costs, especially after Russia’s invasion of Ukraine. However, in Q1 it was able to pass on over 90% of these costs to customers on strong demand, and it sees demand momentum carrying into Q2, he pointed out.

Potential EU sanctions on oil imports from Russia would have minimal impact on the company as it buys key raw materials such as toluene and benzene on world markets, he said.

“On the Russian gas question, it is much less on the agenda politically but if this is curtailed in Germany the entire industry would be affected, including Covestro. German policy does not support this because the economic impact would be very negative,” said Toepfer.

For 2022, Covestro expects energy costs to jump to €1.5bn-2bn from €1.0bn in 2021 but the CFO sees this as manageable amid solid demand growth.

“In Q1 over 90% of these costs were passed on. As long as there is demand strength, and that’s what we see, there will be a flow-through,” said Toepfer.

Aside from China, which has been hampered by COVID lockdowns, demand growth is generally strong in Europe and North America as well as the rest of Asia, he noted.

Covestro in early May took down its 2022 guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) by €500m to €2.0bn-2.5bn, on the China lockdowns, higher energy and raw materials costs and lower global economic growth projections.

“About 50% of this was due to the China effect, and the other half linked to lower GDP projections. But as of the beginning of Q2, we’re not seeing margins going down so the momentum is continuing,” said Toepfer.

However, pockets of demand weakness include automotive, which continues to be constrained by the semiconductor shortage, as well as the furniture market in North America, which was one area cited by US big-box retailers in contributing to massive inventory build-ups in Q1.

Automotive weakness is more supply driven, and could set the stage for a stronger 2023 and 2024, he said.

“If you want to buy a new car in Germany, the waiting time can be one year. In the US it can be several months, and they are charging above list price which is pretty extraordinary. So the growth rate [this year] will be lower than initially expected but pent-up demand is building up, so 2023 and 2024 could be strong years,” said Toepfer.

Thus far, it is “difficult to tell” when auto supply-chain issues will ease, as many expected this in 2022 and it is not happening so far, he added.

On overall logistics and supply-chain constraints, Covestro is far less impacted than many other chemicals companies as it primarily produces for local markets, the executive said.

“We are producing in regions for the regions, not depending much on ocean freight, so our local-for-local strategy is potentially much more successful during these times,” said Toepfer.

Interview article by Joseph Chang


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