Rising costs prompt Covestro to re-examine MDI plant site plans

A sharp rise in U.
S.
construction costs has been a factor in Covestro's re-examination of potential locations for its planned flagship methylene diphenyl diisocyanate (MDI) plant, with China considered an alternative location
.

The company announced Tuesday that it intends to continue work on a world-scale MDI plant after suspending plans to build a unit in the U.
S.
in early 2020
.

The company had announced in January 2020 that it would halt work on a planned 500,000-ton/year MDI plant at its production complex in Baytown, Texas, in the face of challenging global market conditions
.

Construction costs in the U.
S.
, including labor and materials, have increased significantly since the project was first announced in 2018, potentially resulting in a lower return on capital (ROCE) than originally expected, prompting it to revisit investment locations
.

Markus Steilemann, CEO of Covestro, said on an investor call: “Construction costs in the U.
S.
have increased substantially, resulting in lower returns on capital than we originally planned
.
In China, construction costs have remained relatively flat and ROCE is attractive
.
"Strong demand growth in China and Asia has created the need to build another factory in Asia," he added
.

The company is targeting a return of at least seven percentage points above its cost of capital, implying a target ROCE of about 15%, according to CFO Thomas Toepfer
.

"It's certainly a challenge for a new investment
.
But we think we'll at least get close to that, so that's why we're scrutinizing all site options,
" he said
.

According to Markus Steilemann, the company's existing MDI assets are now fully utilized, and a production ramp-up project at its Tarragona, Spain plant is still underway, but expected by 2025, not as originally estimated when the project was first announced in late 2017 of 2022
.

"Until new factories start up, we can only grow slower than demand growth," he said
.

Covestro initially guided $1.
5 billion in capital spending for its new world-scale factory, but that number is likely to rise regardless of whether it ends up in China or the
U.
S.

Markus Steilemann said: "I would say it's no secret that costs have risen dramatically since [the project was announced], especially for materials like steel, but also labor, especially in the US, so that's also what we're looking at.
One of the reasons for all options
.
"

He added: “Relative to $1.
5 billion, there will be a small increase in China, but definitely a big increase in the
U.
S.

He added that a decision would be announced in the next phase of the project's development, with the plant expected to be operational in 2026, two years after the Baytown project's initial forecast start date
.
The capacity of the plant is also likely to be around 500,000 t/y as originally forecast, but the final figure is still to be determined
.
"

other investments

The company also plans to expand its toluene diisocyanate (TDI) production by debottlenecking its facility in Dormagen, Germany, which is expected to be completed in 2023
.
The unit's current production capacity is 250,000 tons/year
.

Also earmarked for investments are coatings and adhesives and specialty films, with plans to spend 300 million euros and 200 million euros each by 2025, while the company is planning more investments in the circular economy
.

Thomas Toepfer said: “In order to achieve our ambitious goal of becoming a fully circular business, we plan to target a capital expenditure of approximately EUR 1 billion on circular economy projects over the next 10 years
.

He added that Covestro is planning to increase capital expenditures in the coming years, with an estimated 800 million euros invested this year, which is expected to expand significantly in the near future
.

The company added that, supported by new investments to realign the business into Solutions and Specialty Materials and Performance Materials in mid-2021, as well as the acquisition of DSM's resins and functional materials business, Covestro expects that by 2024, Interim earnings before interest, tax, depreciation and amortization will rise from 2.
2 billion euros to 2.
8 billion euros
.