Lanxess excess

Rubber Maker Aims to Bounce Back

Better living though chemistry: Lanxess boss Matthias Zachert. Source: Rudolf Wichert/Handelsblatt
Tough and hard-wearing, just like rubber: Lanxess boss Matthias Zachert.
  • Why it matters

    Why it matters

    If Lanxess can turn around its core rubber business, overall sales and profit will rise.

  • Facts

    Facts

    • Lanxess was spun off from German pharmaceutical maker Bayer in 2004.
    • The company makes polymers, specialty chemicals, plastics and rubber.
    • It has invested heavily in rubber production, which makes up 40% of sales.
  • Audio

    Audio

  • Pdf

Mr. Zachert, your appointment as chairman of Lanxess in January caused the company’s shares to surge eight percent. The financial markets must believe you’re worth a premium.

I was happy to acknowledge that. But in the end a company only deserves a premium if it consistently acts and communicates credibly. Which is why I made clear early on that Lanxess has a difficult path ahead of it for the next two to three years.

The stock market has realized that, and the share price has since dropped. Apparently many investors underestimated the difficulties in your main rubber unit. Did that also happen to you?

It was important to me to present our situation in a realistic fashion. Everyone at the firm knows today that we don’t have a small and temporary weakening of demand, but structural problems in the rubber business. Solutions for that will take time.

It would have been easier at your last employer, the pharma and special chemicals concern Merck. Have you regretted changing jobs?

Not at all. I was prepared that we at Lanxess would first have to go through a “valley of tears.” But I’m very satisfied with what we’ve achieved in the nine months that I’ve been here.

Along with a successful capital increase in May and making changes to our organizational structure, we’ve also now implemented successful cost reductions in Germany. Five hundred administrative positions were eliminated with voluntary measures alone. We can avoid layoffs in this first phase of restructuring. The whole team pulled together and for that, they have my thanks and respect.

But you haven’t made it out of the “valley of tears” yet.

That is correct. I cannot yet say we’re past the danger. It will take another two years until we’re back on track again. We are experiencing a clear market shift in our sector. Overcapacity in rubber will continue to increase and that threatens to send prices even lower.

And right now you’re also being hit by an economic downturn.

The weak economy is certainly a negative influence. We see clearly how growth is slowing in several markets. In particular eastern Europe, Latin America, but also Asia. And it’s hitting all industries.

Will the fourth quarter be weaker than expected for Lanxess?

Right now we’re within our forecasts. Results for all of 2014 will more likely fall near the low end of the range.

What is the impact of falling oil prices?

The effect right now is that customers of chemical firms are reducing their inventories and are holding back with new orders. They expect prices for oil-based chemicals to drop. This reduction of inventories could quickly become stronger, but it won’t last for ever. And over the mid-term, the cheap oil should help to boost the economy.

That means that 2015 is likely to get worse before it gets better?

It’s too soon for exact forecasts. But we definitely have a difficult year ahead of us.

That could be because you will open the world’s two largest rubber factories in Asia in the coming year. The timing could have been better.

The decision to build these two plants was made two to three years ago in the expectation of a different level of demand. We won’t run the factories at full capacity immediately, to avoid speeding up the fall of prices. In the second phase of our new direction we exactly analyze our production capacities and production costs and take the necessary steps.

Will factories be shut down?

We are just starting with the analysis and our plan is to communicate its first findings in the second half of 2015.

Your new headquarters in Cologne now seems a bit too big.

It’s set up for almost 1,000 positions, 130 of which have fallen to job cuts. But we will compensate for that by moving some positions in nearby locations in the state of North Rhine-Westphalia to Cologne.

Overcapacities, a bloated administration and production inefficiencies: It appears as if almost everything has got out of control at Lanxess in the past few years.

I prefer to look back at the past ten years and see how much the company has achieved. The stock has almost tripled over this period even relative to today’s price. But it’s clear that we ourselves have contributed with our massive investments to an imbalance between supply and demand in the rubber segment. We want to correct that now as the global market leader.

Is Lanxess able to survive on its own?

Yes, certainly. Sixty percent of our firm’s portfolio is doing well. In those areas we make excellent profits. We will fix the other part, the rubber business, in the next two to three years.

Wouldn’t it be better to seek a more radical solution, such as merging with a larger competitor or spinning off the rubber segment?

We want to stay independent and strong enough to achieve our value-creating goals. The rubber business is in principle a good one with solid, long-term opportunities.

Which areas at Lanxess are still earning well and which are slated to be expanded?

We see our future investment focus in the areas of intermediate products and performance chemicals. We are coming out of the period when we invested massive amounts of money in rubber. There wasn’t much left over for other sectors. That will change in the coming years.

Your old parent company Bayer just announced it wants to shed the rest of its chemicals activities by spinning off Bayer Material Science (BMS).

That is a portfolio change that I think makes a lot of sense.

Are there units that would have been better off at Lanxess?

That’s not a question for now. You should have perhaps asked that ten years ago.

Well, it can be asked again.

The Lanxess spinoff was a very successful move at the time and we’ve developed well. Now I wish BMS lots of success as an independent company.

 

Bert Fröndhoff is deputy head of Handelsblatt’s companies and markets desk. Siegfried Hofmann is Handelsblatt’s chemicals and pharmaceuticals correspondent. To contact the authors: froendhoff@handelsblatt.com and hofmann@handelsblatt.com

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