German plastics maker Covestro AG is expanding its site in Baytown, Texas, to balance out global production capacity and reduce exposure to potential trade barriers, according to the company’s finance chief.

The company said Tuesday it would spend €1.5 billion ($1.7 billion) on a new U.S. plant to manufacture methylene diphenyl diisocyanate, or MDI, a chemical needed for the production of rigid foam, an insulation material used in buildings and refrigerators.

By adding a total of 410 kilotons of production capacity, Covestro will have the ability to manufacture 740 kilotons of MDI a year in North America by 2024, similar to its production capacities in Europe, the Middle East and Africa, and the Asia-Pacific.

“A more even distribution of capacity means we won’t have to ship our products across oceans,” Thomas Toepfer, the company’s finance chief, said Thursday in an interview with CFO Journal. “This makes us more immune against potential trade barriers.”

Covestro could be hit should global economic sentiment decline because of tariff tensions between major economies, Mr. Toepfer said. “Some of our clients are worried,” he said. These clients tend to place smaller but more frequent orders, he said.

Despite a potential drop in global economic growth, the company forecasts that demand for MDI will grow about 5% annually. Even with the new plant in Baytown—set to be operational in 2024—global utilization rates at MDI factories across the industry will remain high, hitting 94% in 2024, according to analysts at Commerzbank AG .

Adding capacity to the Baytown site makes perfect sense for Covestro, analysts say. “It is the most profitable site they have,” said Patrick Lambert, an analyst at Raymond James Financial International Ltd. “It was pretty logical for them to expand there.”

Baytown presents Covestro with a number of advantages, including low construction costs, existing infrastructure and access to logistics networks, Mr. Toepfer said. The site has been in operation since 1971.

The expansion is part of an investment plan that involves capital expenditures of up to €1.2 billion a year over the next three years, up from €700 million in 2017. Funding will come from the company’s cash flow, Mr. Toepfer said. Covestro’s free operating cash flow was €1.8 billion in 2017, up 34.8% from 2016.

Covestro will remain committed to remunerating its shareholders regardless of the U.S. investment, Mr. Toepfer said.

The company is buying back €1.5 billion of shares, or 10% of its share capital, and plans to keep the dividend stable or raise it. Covestro is paying a dividend of €2.20 this year, up 63% from the €1.35 it handed out in 2017.

 

Source: wsj.com

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