Issue Date: March 12, 2007
It isn't often that the chief executive of a major European chemical company surfaces at Informex, the annual U.S. trade show for fine and custom chemicals. Informex, in fact, rarely draws top executives from the major U.S. companies. This year, however, Klaus Engel, the new chairman of Degussa, had a meeting room reserved right outside the press office.
Engel began his career at the German industrial conglomerate Veba, working for its Hüls and Creanova divisions, both now part of Degussa, and with its energy division. More recently, he served for seven years on the executive board of Brenntag, a major logistics company.
He arrived at Degussa last June at a crucial juncture in the chemical firm's history. The German company RAG was taking full control of Degussa while readying the spin-off of its German coal-mining business. Today, RAG owns all of Degussa, plans to complete the transfer of the mining unit to a separate trust it expects to establish early this year, and is preparing an initial public offering (IPO) of stock later this year as a chemicals, energy, and real estate group with a new name.
For Degussa watchers, the IPO plan raises the question of how chemicals will fit with the group and whether more changes lie ahead. But according to Engel, there is little question that RAG values the chemical business, including the exclusive synthesis and catalysts component that brought him to San Francisco for Informex.
"It's a wonderful opportunity to get the taste and smell of what is going on in this industry," Engel told C&EN, acknowledging that the market has not been particularly appetizing in recent years. "We know that a lot of companies have gone through the trough because of overcapacity." Degussa, he admitted, is one of them.
The market has rebounded since last year, however, allowing Degussa to benefit from its strategy of accessing technologies and low-cost assets through partnerships. "I am trying to get new impulses and new ideas for what could be further growth options in emerging markets but also in markets like Europe and the U.S.," Engel said of his trip to California. "For me, it's important to get an answer to what comes next."
Engel is eager to dispel the notion that there will be more big changes for Degussa anytime soon. "The logic is simple," he said. "Since the end of last year, Degussa is 100% owned by RAG. The group decided to invest in specialty chemicals for a very good reason. It is strongly convinced that specialty chemicals is a growth opportunity."
On the basis of its results for the first nine months of the year, Degussa was on course to end 2006 with sales of about $14.4 billion and earnings before interest and taxes of $1.2 billion, making the company by far the most important piece of RAG. "If you look at people and cash flow, Degussa chemicals is 70-80% of all of it. It's very important we demonstrate our leading market position, our profitability, and also our growth options that we can bring to the table."
Degussa, in fact, is done downsizing for now, Engel claimed. The $2.6 billion sale of its construction chemicals business to BASF a year ago capped a program to dispose of $8 billion in assets. "I cannot rule out that, 20 years from now, there might be one or another business we might divest or bring into joint ventures, or we might buy some businesses," he said. "But what I can tell you right now is that the portfolio of businesses we have, in particular the exclusive synthesis and catalysts business, are core, and we are looking for growth options."
The exclusive synthesis business, which accounted for about 3% of Degussa's 2005 sales, has struggled to make money over the past five years, Engel concedes. However, a trio of joint ventures and alliances illustrate the company's success in cultivating long-term contracts and developing a low-cost global production network.
Last year, Degussa sold its Raylo Chemicals manufacturing site in Edmonton, Alberta, its only North American fine chemicals facility, to Gilead Sciences, a biopharmaceutical firm near San Francisco. Gilead will use the plant for process development and pilot-scale production. It has agreed to buy certain European-made pharmaceutical chemicals from Degussa under a long-term agreement.
Separately, Degussa formed a joint venture with Lynchem, a Chinese fine chemicals producer, and entered an intermediates supply contract with Hikal, an Indian producer. "We have made progress and set standards on how to organize the industry, and we are now leveraging on the fruits of those ideas," Engel said.
Looking at the company as a whole, Engel noted that Degussa's sales grew 10% last year. "More important, earnings grew by almost 20% and the impact from exclusive synthesis and catalysts was considerable," he said.
Engel said Degussa is committed to maintaining leading market positions in its three technology sectors: technology specialties, including fine chemicals; specialty materials; and consumer-product-oriented chemicals. "Size is an important prerequisite," he stated. "If you are engaging yourself globally, you need critical size."
The company, he claimed, is in a number one or two position in 80% of the markets it serves. "This doesn't mean that I feel comfortable with the market positions we have right now, but I do not see a major strategic gap that forces us into big acquisitions," he said. "And we have a very nice pipeline for internal growth."
The exclusive synthesis business will be a key part of this, Engel added. "It tells me the measures we have taken in that part of the portfolio are working," he said. "And we are looking for options to grow even beyond that."
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