Plastics makers such as Bayer AG (BAYN) and Lanxess AG (LXS) have created everything from a plastic saxophone that can be played in live concerts to Harley Davidson engine parts made entirely of the synthetic material.
The push to introduce new plastic offerings -- as new manufacturing techniques allow the replacement of metal, fibers and wood in many products -- can’t mask the fact that a drop in demand, coupled with over-optimistic spending on new plants, is prompting Europe’s biggest producers Bayer, Lanxess and Evonik Industries AG (EVK), to cull at least 3,700 jobs.
European sales haven’t recovered from pre-crisis levels in 2008 and fell more than 2 percent to 86.7 billion euros ($116 billion) last year, according to lobby group PlasticsEurope. Even with new applications, producers can’t make up for the woes at the commodity business where rising competition from low-cost Asian manufacturers is hurting profitability, Union Investment fund manager Christopher Schaefer said.
“The companies are trying to stay ahead of the game and they are trying to add new innovative materials at the top, where you can make good money,” said Schaefer, who helps manage an 800 million-euro fund that includes BASF SE (BAS), Bayer, Lanxess and Evonik stock. “But now we’re facing a slower growth environment and competition in general is picking up dramatically.”
Traditional plastics still account for about 85 percent of the total market. Europe accounts for 20.4 percent of the world’s production and China is the biggest producer with 23.9 percent, according to PlasticsEurope.
Getting It Right
Roberto Gualdoni, chief executive officer of Styrolution Group GmbH, says commodity offerings -- such as polystyrene for electronic devices and refrigeration liners -- still represent most of his industry’s business.
“You shouldn’t fool yourself into saying that you have some huge innovation,” Gualdoni said in an interview. If it’s not a large technological advance, then you have to rely on “normal operational excellence,” he said.
Styrolution, a joint venture of BASF and Ineos Group Holdings Ltd., has cut costs at its commodity units and is investing in the specialties business. In the last seven years, the industry lowered its capacity for styrenic materials, used in household appliances and transparent packaging for compact discs, by about 25 percent, the CEO said.
“The commodity business of styrenics is a hard, hard business,” Gualdoni said. “It was our sweetheart when we started and it looked so nice. Now she has put on some extra pounds. But we still love her. You really have to love this industry to be in it because it is extremely hard.”
The suffering is being exacerbated by the companies themselves as they build new plants, adding capacity before demand catches up, Union Investment’s Schaefer said.
“I would like to see capital discipline,” he said. “Some of these companies have announced capacity expansions that are enormous.”
Evonik, which listed shares in April, is seeking annual savings of as much as 700 million euros. It may cut headcount by about 1,000 through voluntary departures and retirement, according to a person familiar with the matter, who asked not to be identified because the plan isn’t public. A spokeswoman at Essen, Germany-based Evonik said final job-cut numbers haven’t been decided yet.
Lanxess, whose products include synthetic rubber for tires with low rolling resistance to save fuel, is spending 910 million euros on three Asian synthetic-rubber plants and a European polymer factory. The Cologne, Germany-based company plans 1,000 job cuts to help save 100 million euros a year from 2015. Headcount may be reduced by a further 1,000 as units are sold or put into joint ventures, Chief Executive Officer Axel Heitmann said in September.
The company lowered the top end of its 2013 profit goal today, saying the business environment will remain difficult, especially in the tire and automotive industries.
“The question is, what percentage of our products are innovation driven and what percentage are more mature?” Heitmann said today on a conference call. “We work on that continuously and watch that number intensively.”
Bayer and BASF are both building new factories in Germany to make toluene diisocyanate, or TDI, increasing production capacity for the component used in seating cushions and mattresses by a combined 600,000 tons, an increase of 30 percent from what was consumed in 2012.
The new capacities will start production in a period of muted growth. Last month, the International Monetary Fund cut its 2013 and 2014 forecasts for the global economy, citing weakness in emerging markets.
“At the beginning of the year, most companies were expecting a more dynamic upswing and now they see that not much is coming in terms of recovery,” said Ulle Woerner, an analyst at Landesbank Baden-Wuerttemberg. “Now they have to do something on the cost side.”
Bayer, which is based in Leverkusen, Germany, is talking to worker representatives about cutting as many as 700 jobs at MaterialScience after reducing its full-year profit forecast for the unit in July. While BASF hasn’t announced firings at its plastics operation, it is seeking savings from dissolving the unit and absorbing pieces into other parts of its business.
“The cuts are an attempt to bring profitability up to a level where future investments will be worth it,” LBBW’s Woerner said. “If you continually fail to earn your cost of capital then you have to ask yourself the question: does it still make sense?”
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