Covestro halts $1.5bn MDI project plans amid weaker demand expectations

Tom Brown

07-Nov-2022

LONDON (ICIS)–Covestro has paused development of a $1.5bn methylene diphenyl diisocyanate (MDI) plant project once more "until further notice", with short-term demand expectations weakening in the wake of slowing global GDP growth.

Originally announced in 2018 and halted in early 2020 due to the challenging global conditions, Covestro moved to revive the project in late 2021.

China had been mooted as a potential location in place of Baytown, US, which had been the original Covestro site where the flagship plant had been slated for development before high US engineering costs prompted a rethink.

A final decision on whether to develop the 500,000 tonne/year unit in the US or China had been expected before the end of the year, but will now be held indefinitely.

"The war in Ukraine, the European energy crisis and…growing inflation have severely disrupted the global economy," said Covestro CEO Markus Steilemann, as he described the decision to "pause the project for the moment and reassess it at a later time".

High inflation, energy pricing, the impact of the Russia-Ukraine war and COVID-19 lockdowns in China are among the factors that have driven an ongoing deterioration in global economic growth expectations, resulting in forecasters cutting projections with each update.

The IMF currently expects global GDP to increase 3.2% this year and 2.7% next year, according to the organisation's October 2022 World Economic Outlook.

When Covestro first announced the project, the company forecast 5% average annual growth in MDI demand, under an assumption of global GDP plus two percentage points.

Covestro now expects longer-term annual MDI demand growth of 6% per year, according to a company spokesperson, but shorter-term expectations are considerably weaker.

"We do expect weaker demand in the short term due to increasing economic uncertainties caused by the European energy crisis, the looming recession and the weakening global economy," the spokesperson said.

The project was expected to have a development period of five to six years, with Covestro projecting an end-2024 completion date from the original October 2018 announcement, and a 2026 completion date when the venture was revived in 2021.

The price tag could be set to increase if it moves forward from the original $1.5bn estimate due to the higher cost of engineering staff. Company CEO Markus Steilemann had conceded in an investor call in September 2021 that planned capital expenditure (capex) of $1.5bn for this project would need to increase, especially if the plant were to be built in the US.

The latest halt to the project implies that Covestro will not be adding new MDI capacity at the scale envisaged by this proposed plant until late this decade or even later.

In the meantime, the company is examining debottlenecking opportunities, according to a spokesperson.

"We are constantly evaluating various options to improve and expand our global production network for MDI. Debottlenecking existing production remains an option to achieve this," the spokesperson said, reaffirming the company's commitment to recently started work on a new aniline plant in Antwerp, Belgium, to serve its MDI operations

The company's CFO, Thomas Toepfer, spoke of "unprecedented challenges that are shifting the global economic situation fundamentally" which prompted Covestro to take "a closer look" at the MDI project.

Covestro's third-quarter earnings fell sharply, year on year, on the back of higher energy and raw materials costs, the company said in October.

MDI is consumed mainly in polyurethane (PU) foams, which account for about 80% of global consumption.

Rigid foams, the largest outlet for MDI, are used mostly in construction, refrigeration, packaging and insulation.

MDI is also used to make binders, elastomers, adhesives, sealants, coatings and fibres.

Front page picture: Covestro's headquarters in Leverkusen, Germany Source: Friedemann Vogel/EPA-EFE/Shutterstock

Update: R-leads story, adds spokesperson commentary, additional details throughout

Additional reporting by Jonathan Lopez

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