China Economy

Plastics maker Covestro looks past China slowdown

German firm remains optimistic about mainland market despite slump in construction and manufacturing

PUBLISHED : Sunday, 06 December, 2015, 6:12pm
UPDATED : Sunday, 06 December, 2015, 6:12pm

Plastics maker Covestro, formerly Bayer MaterialScience, remains optimistic about the mainland market despite the prolonged slowdown in construction and manufacturing activities that saw its third-quarter sales there slump 7 per cent year on year.

The German firm is counting on diversification of its markets and product lines to hedge its risk amid volatile global economic conditions, its chief financial officer, Frank Lutz, said.

“We are not dependent on one country and not on one product,” he said. “We are still extremely happy with our business development in China … even if there is only 5 per cent growth in China for the next couple of years, it would still be a fantastic number for us as it is still be a bigger growth rate than most of the regions that we have operation.”

In the third quarter of this year, Covestro’s China sales dropped 7 per cent year on year to 453 million (HK$3.7 billion), compared to 5 per cent growth in the United States to 680 million and a 2 per cent rise in Germany to 415 million.

Even if there is only 5 per cent growth in China for the next couple of years, it would still be a fantastic number for us
Frank Lutz, Covestro

For the first nine months of the year, its China sales grew 5 per cent, while those in the US increased 4 per cent and Germany was flat.

“What we saw was that business confidence in China in the third quarter went down, so our customers released their stock [to their customers and cut purchases] … we don’t think this is a general [trend] because once destocking has happened, our customers will start buying again,” Lutz said. “It is a reflection of the uncertainty in the third quarter so that people got more cautious.”

Covestro derived 22 per cent of its sales last year from the automotive and transportation sector, 19 per cent from construction, 18 per cent from furniture, 19 per cent from leisure, cosmetics and health, 13 per cent from electrical and electronics and 9 per cent from chemicals.

The Asia-Pacific region accounted for 28 per cent of its global sales of 11.7 billion last year, compared to 38 per cent from Europe, 22 per cent from North America and 12 per cent from South America, Africa and the Middle East. China accounted for 15 per cent of its global revenue.

It spends around 2 per cent of its sales on research and development, which takes place in Shanghai, Texas in the US and Germany.

Lutz said the firm remained optimistic about the China market despite the economic slowdown, since the central government’s pursuit of sustainable development and environmental protection created new demand for its products.

They include polycarbonate used in auto parts to make vehicles lighter and more fuel-efficient while retaining strength and safety features, and polyurethane used to make building insulation materials and stronger blades in wind turbines.

Covestro is 69 per cent owned by German drug maker Bayer, which has indicated a plan to completely divest its stake in Covestro after its separate listing on the stock market in October, without giving a time frame.

Covestro raised US$1.7 billion from its initial public offering, 40 per cent less than the original target, amid slumping global share markets and a pollution-cheating scam at auto giant Volkswagen, a major customer.

The proceeds were primarily intended to repay debt owed to Bayer so that the latter could have more resources to develop its health care and pesticides businesses.

Lutz told the German weekly Euro am Sonntag on Sunday that Covestro intended to pay Bayer its outstanding debt of 2 billion next year, Reuters reported.