Cost increase prompts Covestro to re-examine the location plan of MDI factory

The sharp increase in construction costs in the United States has become a factor in Covestro's re-examination of the potential location of its planned flagship methylene diphenyl diisocyanate (MDI) plant, and China is considered an alternative location.

The company announced on Tuesday that it intends to continue work on a world-scale MDI plant after suspending plans to build a device in the United States in early 2020.

The company announced in January 2020 that, in the face of challenging global market conditions, it would stop work on the planned 500,000-ton/year MDI plant in its Baytown, Texas production complex.

Since the project was first announced in 2018, construction costs (including labor and materials) in the United States have increased significantly, which may cause the return on capital (ROCE) to be lower than originally expected, prompting it to revisit the investment location.

Covestro CEO Markus Steilemann said on the investor conference call: "The U.S. construction costs have increased significantly, resulting in a return on capital that is lower than our original plan. In China, construction costs have remained relatively stable, and ROCE is attractive. "He added: "The strong demand growth in China and Asia has created the need to build another factory in Asia."

According to Chief Financial Officer Thomas Toepfer, the company's goal is to make the rate of return at least seven percentage points higher than its cost of capital, which means that the target ROCE is about 15%.

"This is of course a challenge for a new investment. But we believe that we will at least get close to this goal. Therefore, this is why we strictly review all location choices." He said.

According to Markus Steilemann, the company’s existing MDI assets are currently being fully utilized, and the production increase project at its Tarragona plant in Spain is still in progress, but is expected to be in 2025 instead of the initial estimate when the project was first announced at the end of 2017 In 2022.

He said: "Before the new plant is launched, our growth rate can only be slower than the demand growth."

Covestro initially guided $1.5 billion in capital expenditures for its new world-scale factory, but this number may rise regardless of whether it is ultimately located in China or the United States.

Markus Steilemann said: "What I want to say is that since [project announcement], the cost increase has been no secret, especially for materials like steel, and labor, especially in the United States, so this is what we are studying One of the reasons for all options."

He added: "Compared to US$1.5 billion, there will be a small increase in China, but there will definitely be a substantial increase in the United States.

He added that a decision will be announced in the next stage of project development and that the plant is expected to be put into use in 2026, two years later than the initial projected launch date of the Baytown project. The factory's production capacity may also be around 500,000 tons/year as originally predicted, but the final figure is still to be determined. "

Other investment

The company also plans to expand its production of toluene diisocyanate (TDI) by debottlenecking its facilities in Dormagen, Germany, which is expected to be completed in 2023. The current production capacity of the device is 250,000 tons/year.

Also designated for investment are coatings and adhesives and specialty films, with plans to spend 300 million euros and 200 million euros each by 2025. At the same time, the company is planning to make more investments in the circular economy.

Thomas Toepfer said: "In order to achieve our ambitious goals and become a fully circular company, we plan to target capital expenditures on circular economy projects of approximately 1 billion euros in the next 10 years.

He added that Covestro is planning to increase capital expenditures in the next few years. This year, an investment of 800 million euros is estimated, which is expected to expand substantially in the near future.

The company added that with the support of new investments, in mid-2021, it will adjust its business to solutions and specialty materials and high-performance materials, as well as the acquisition of DSM’s resin and functional materials business. Covestro expects that by 2024, Interim earnings before interest, taxes, depreciation and amortization will increase from 2.2 billion euros to 2.8 billion euros.