Forecast cashed
Lockdown in China thwarts Covestro plans
05/03/2022, 1:00 p.m
Energy efficiency, electromobility, wind power and alternative energies – Covestro sees itself in an excellent position for the future and expects brisk demand. But at the moment the corona crisis in China is weighing heavily on the Dax group. Added to this are the high energy prices.
The ongoing corona lockdown in Shanghai is hitting Covestro hard. The plastics manufacturer lowered its targets for 2022 due to the consequences of the lockdown and higher energy and raw material costs – despite a better than expected start to the year. “In the first quarter we benefited from continued high demand,” explained CFO Thomas Toepfer. “Since the beginning of the Ukraine war, however, we have seen that the risks with regard to our energy supply and supply chains have increased significantly.”
For 2022, Covestro now expects an operating result (Ebitda) of between 2.0 and 2.5 billion euros. So far, the group had expected a decline to 2.5 to 3.0 (previous year: 3.1) billion euros. Analysts had recently forecast an average of 2.7 billion euros. The board also lowered its guidance for operating free cash flow. The gloomier prospects were not well received on the stock market: Covestro shares fell by up to seven percent to their lowest level in almost two years.
In the first quarter, Covestro was able to grow strongly thanks to price increases. According to Toepfer, more than 90 percent of the increased raw material and energy prices could be passed on to customers. Sales soared by more than 41 percent to 4.7 billion euros. At EUR 806 million (prior-year period: EUR 743 million), the operating result was within the scope of the previous forecast. Covestro thus performed better than analysts had expected.
Lockdown will hit Covestro “quite badly”
For the second quarter, however, Toepfer only expects a result of between 430 and 530 (817) million euros. The lockdown in China will burden Covestro more and for longer than originally thought and will “hit quite badly” in the second quarter. The company has a large manufacturing base in Shanghai employing 1400 people and manufactures all of its main products there. Covestro was basically able to maintain production there, “by letting the employees operate in a bubble. But the logistics problems and the problems of the other suppliers have worsened so much that ultimately sales drop quite sharply.” The Leverkusen-based company generates more than a fifth of its sales in China.
Covestro is also feeling the effects of the explosion in energy prices. Toepfer now expects the company’s energy costs to double to between EUR 1.7 billion and EUR 2.0 billion in 2022. So far he had assumed an increase of 50 percent to 1.5 billion. Covestro is trying to arm itself against negative effects from the issue of energy security by examining options other than gas for operating its plants – such as older coal-fired or oil-fired power plants, some of which are located in the chemical parks. However, the chief financial officer warned that a short-term gas embargo would lead to “significant upheavals”.
In principle, Toepfer is optimistic about future business prospects. “Energy efficiency, electromobility, wind power and alternative energies are all our main customers. Therefore, the demand for our products is not affected by the current uncertainty in the medium and long term,” said the manager. “In the long term, we are not less optimistic than we were before, but we actually see it as an effect for 2022.”