NEW YORK (ICIS)–Germany-based LANXESS is
prepared for the worst-case scenario if all
Russian gas supplies to Europe are cut off, as
it can reduce production or shut down
gas-intensive units, allowing most of the rest
of its operations to continue, its CEO said.
“We are prepared – we have done our detailed
assessments on what happens if no gas is going
to come from Russia. We have a few plants that
are very gas intensive and therefore by
reducing production at these plants or shutting
down two very gas intensive production units,
we can mitigate completely the gas coming from
Russia,” said Matthias Zachert, CEO of LANXESS,
in an interview with ICIS in New York.
The two production units, which product lines
were not identified, are at the company’s
largest site in Leverkusen, Germany where it
has 23 production units.
At its Leverkusen site, LANXESS produces basic
chemicals, precursors and active ingredients
for pharmaceuticals and crop protection
products, raw materials for paints and
coatings, products for water purification, and
plastic additives.
The shutdown of the two units would reduce
natural gas consumption at Leverkusen by 50%,
allowing its other units to produce at
sufficient volumes, he noted.
GAS PRICE LEVELS UNSUSTAINABLE
The current sky-high level of natural gas
prices in Europe is unsustainable, as both
consumers and industry are already cutting down
usage, according to the CEO.
“There is a lot of panic priced into the market
– we have seen price hikes of 1,000-2,000% –
that’s absurd but sometimes markets overreact
in one direction and then overreact in the
other,” said Zachert.
“If now consumers consume less because of the
price, and also the industry produces less
because they cannot roll over the pricing to
the end customer, consumption will go down. Gas
is a commodity, and when consumption and demand
go down, of course the price should correct as
well,” he added.
The key question is: Where will the new normal
for energy prices be for the industry? The jury
is still out, he noted.
On 25 August, the ICIS benchmark for European
gas prices – the front month Dutch TTF – hit a
record high of over $91/MMBtu. Prices were
mostly in the single digits through the first
half of 2021 before the start of higher
volatility. Volatility intensified after the
start of the Russia-Ukraine war in February and
the subsequent reduction of Russia gas flows
into Europe.
The LANXESS CEO expects a peak in European
energy prices soon.
“Let’s face it – we have reached a situation
where it really cannot get that much worse. The
capital markets are factoring in a tough
recession – a hard landing. Energy prices have
reached a peak – the worst scenario – and
therefore there are little further negative
shocks that can occur,” said Zachert.
“We see industry players shutting down plants –
fertilizer plants for instance. They absorb
huge amounts of gas. If all of them are
stepping down – the private consumer and
industry consumer, demand will go down,” he
added.
Capital markets tend to anticipate “pitch
black” – or the worst-case scenario – 3-5
months before it actually happens, he noted,
pointing to the COVID-related stock market
collapse and trough in March 2020 – months
ahead of the severe slowdown in volumes
starting in June.
RAW MATERIAL SUPPLY
In the meantime, LANXESS is not having problems
sourcing key raw materials such as
gas-intensive ammonia, despite widespread
shutdowns in Europe, according to the CEO.
“There are ammonia plants that have closed down
in Europe but ammonia is a global commodity and
you can still source it from other parts of the
world which we do. Our production site [using
ammonia feedstock] is directly in the harbour,
so we get ships from overseas,” said Zachert.
LANXESS uses ammonia feedstock in the
production of caprolactam (capro) at its
Antwerp, Belgium site, which then feeds into
nylon 6 (polyamide 6) at the site.
The company has capro capacity of 220,000
tonnes/year at Antwerp, according to the ICIS
Supply and Demand Database.
“As far caprolactam is concerned, there are two
competitors in Europe that have had to close
down and reported force majeure. We didn’t
because if you look to our capro production
process, first, we are less gas intensive,”
said Zachert.
“Second, if you look at the Antwerp site and
the configuration, we have excess steam
production in other parts of our production
units at Antwerp that supply the capro stream…
We are basically to a large extent
self-sustained,” he added.
In Europe, LANXESS has built up inventories in
certain unspecified raw materials to mitigate
the risk of force majeures.
“Everybody does their own thing, but we decided
in the last 6-12 months to have safety stocks
because of the logistical constraints and
disrupted value chains, so we stocked up on
some raws where we knew supply was tight,” said
Zachert.
“In the current environment where you have no
normal established raw material flows… you have
to build enough safety stocks and liquidity. If
you don’t, you run into a force majeure which
is always more painful for customers. As a
reputed chemical company with international
reach, this is something we definitely decided
to do,” he added.
DEMAND SOFTENS IN Q3
On the demand side, the softening in Q2 is
continuing into Q3 “but there is no sudden
brutal double-digit volume decline – this is
not happening,” said Zachert.
“We see clearly that automotive and
construction are softening but there are other
industries that are growing like the
agrochemical markets which had been in a trough
for the last 5 years,” he added.
LANXESS’ Consumer Protection segment, which
includes flavours and fragrances, material
protection products (disinfectants,
preservatives), liquid purification
technologies (water treatment) and agrochemical
and pharmaceutical ingredients, is doing
“reasonably well” but there are logistics
constraints in shipping from the US to Europe,
as well as Europe to Asia because of congested
ports and other issues, he noted.
“Logistics constraints are no longer getting
worse. Here and there logistics are mildly
improving but it’s still very constrained, so
we still see this as a major issue on the
radar, and our assumption is that it will not
improve before the second half of 2023,” said
Zachert.
Improvement in the back half of 2023 will come
from increasing shipping capacity from ocean
freight companies as well as an expected
weakening of business conditions which will
reduce demand, he added.
Meanwhile, China demand is ticking up but it’s
still too early to tell if this can be
sustained.
“What took me by surprise was that China
started to rebound a little. Now we have to see
if this was just a [blip] or if this is kicking
in with more momentum now that the severe
lockdowns are no longer done country-wide,”
said Zachert.
Interview article by Joseph
Chang
