Insight & Analysis

Surviving the energy crisis: US production switch; pass on costs to consumers

Published: Nov 2022

Oliver Stratmann, Head of Treasury and Investor Relations at LANXESS explains how treasury is supporting the German chemical group through the energy crisis.

We are a leading speciality chemicals company based in Cologne. With around 13,200 employees in 33 countries, we are an established company on the global market. Our core business is the development, manufacturing and marketing of chemical intermediates, additives and consumer protection products with annual sales of €6.1bn (2021). Our energy sourcing differs from country to country. At some sites, we even produce our own energy. Despite the war in Ukraine, the sourcing at our major sites in the Lower Rhine region in Germany is secure. Here chemical park operator Currenta provides LANXESS with electricity and steam produced in the park’s own power plants. Our energy supply is based on long-term contracts.

Energy prices have risen substantially since the start of the war – and we expect our energy costs to double in 2022 compared to 2021. So far, we have been able to pass on increased raw material and energy prices fully, albeit with a time lag of around a quarter to our customers.

Treasury is in close collaboration with our procurement department in order to assess the situation and decide whether physical hedging or hedging via financial derivatives makes any sense, but we don’t currently hedge energy.

LANXESS is committed to becoming climate neutral by 2040. This includes a switch to green energy. We are constantly evaluating the potential to switch energy sources and use alternative ways to operationally run plants. Technical possibilities here are however limited. Importantly, we have substantially increased exposure to US based production, and this helps us.

We are passing on higher energy costs to our customers and thereby ensuring that absolute profits remain protected. However, inflation in the top line of our sales arithmetically leads to lower margins. Massive inflation could also lead to a decline in demand which fuels the broadly discussed fears of a recessionary environment.

Our liquidity reserves have been ample and have been diligently prepared since the beginning of the year. Passing on raw material and energy costs ensures that we are being compensated for the higher costs. Nevertheless, our inventory levels and hence tied-up cash, are higher as disruptions in global value chains and higher prices drive up values and volumes of goods in transit and inventories. It is key to be prepared to finance rising cash needs in working capital. Fortunately, we anticipated the current situation early and have been preparing since the beginning of the year.

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