The Urethane Blog

Covestro MDI Expansion Plans

Higher costs drive re-examination of Covestro MDI plant location plans – CEO

Author: Tom Brown


LONDON (ICIS)–A significant increase in construction costs in the US has become a factor in Covestro moving to re-examine the potential location of its planned flagship methylene diphenyl diisocyanate (MDI) plant, with China mooted as an alternative.

The company announced on Tuesday that it intends to proceed with work on a world-scale MDI plant, after suspending plans to build a unit in the US in early 2020.

The producer had announced in January 2020 that it would halt work on its planned 500,000 tonne/year MDI plant at its Baytown, Texas, production complex, in the face of challenging global market conditions.

A substantial increase in construction costs in the US, both in terms of labour and materials, since the project was first announced in 2018 could result in a lower return on capital employed (ROCE) than originally anticipated, prompting the re-examination of the location for the investment.

“Construction costs in the US have significantly increased, leading to a lower return on capital employed versus our original plan,” said Covestro CEO Markus Steilemann, speaking on an investor call.

“In China, construction costs have remained relatively flat, with attractive ROCE. Strong demand growth in China and Asia creates the need for another plant in Asia,” he added.

The company targets a return of at least seven percentage points above its cost of capital, according to CFO Thomas Toepfer, meaning a target ROCE of around 15%.

“That is certainly a challenge for a greenfield investment. But we think that we will be at least close to that, and therefore, this is also why we’re critically looking into all the options with respect to locations,” he said.

The company’s existing MDI assets are fully utilised at present, according to Steilemann, with a project to increase capacity at its Tarragona, Spain, plant, still underway but expected by 2025 instead of the initial estimate of 2022 when the project was first announced at the end of 2017.

“We are only able to grow below demand growth until the start-up of a new plant,” he said.

Covestro had originally guided for capital expenditure of $1.5bn for its new world-scale plant, but that figure may be set to rise irrespective of its final location in China or the US.

“I would say it’s not a secret that there has been significant cost inflation since [the project was announced], especially for materials like steel but also for labour, especially in the US, so this is one of the reasons why we are looking into all the options we have,” Steilemann said.

“Relative to the $1.5bn, there would be a slight increase to that in China, but there would certainly be a significant increase in the US,” he added.

A decision will be announced at the next stage of project development, he added, with the plant expected to be commissioned in 2026, two years after the original forecast start date for the Baytown project. The plant capacity is also likely to be around the originally forecast 500,000 tonnes/year, but the final figure is still to be determined.

The firm is also planning to expand its toluene diisocyanate (TDI) production by de-bottlenecking facilities in Dormagen, Germany, expected to be complete by 2023. The unit currently has a production capacity of 250,000 tonnes/year, according to ICIS data.

Also earmarked for investment are coatings and adhesives, and specialty films, with planned expenditure of €300m and €200m apiece by 2025, while the firm is planning more investment in the circular economy.

“In order to achieve our ambitious objectives and become fully circular, we are planning targeted capex spending of around €1bn on circular economy projects over the next ten years,” Toepfer said.

Covestro is planning to increase capital spending over the next few years, with an estimated €800m of investment this year expected to expand substantially in the near future, he added.

On the back of new investments, the realignment of the business into solutions and specialties and performance materials in mid-2021, and the acquisition of DSM’s resins and functional materials business, Covestro expects to increase mid-cycle earnings before interest, taxes, depreciation and amortisation (EBITDA) from €2.2bn to €2.8bn by 2024, the company added.

 (update re-leads, adds CEO, CFO comment)