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Brazil to become a key player in synthetic rubber production worldwide

Werner Breuers

Member of the global management board/Lanxess

Published  Monday, September 14, 2009

German chemical firm Lanxess announced last year it is focusing its growth strategy on the BRIC (Brazil, Russia, India and China) countries, where operations have stood up well to the effects of the global economic crisis.

BNamericas spoke with Dr Werner Breuers, a member of Lanxess' management board, during the "Betting on Brazil" conference held by the company in São Paulo to discuss opportunities brought about by the crisis, investments and short-term perspectives.

BNamericas: Lanxess has announced it expects Brazil to become a platform for synthetic rubber production. Why is that and why Brazil?

Breuers: There are several reasons, but let me mention a few important ones. First of all, Brazil is historically a big producer of rubber. It started with natural rubber, but after the development of synthetic rubber, the country, along with its petrochemical industry, became a major player in this sector.

On top of that, now the industry from North America is coming south. Car and tire industries are moving from Detroit, from the steel belt in the US, south to Mexico and also South America, especially to Brazil. It means our main clients are coming to South America and it is an important reason for us to be active here.

And the third major reason is because Brazil is one of the strongest growing nations with a big population, so the market is here.

BNamericas: Bearing in mind raw material supply and production costs, is it competitive to operate in Brazil and is it viable to turn the country into this productive platform?

Breuers: For sure we need to see improvements in Brazil, especially with energy costs. But more than that, raw material prices represent a difficult issue, as Brazil is very match-oriented to North American prices and those prices, mainly in the last few years, have not always reflected the international market trends. So if you want to be competitive globally, then we need more flexibility in raw material prices here.

From the pure production costs point of view, I think Brazil is competitive.

BNamericas: Lanxess plans to invest 110mn euros [US$161mn] in R&D globally in 2009. How much is being invested in the Brazilian division?

Breuers: This is very difficult to say, but we have a clear intention to internationalize our R&D. In the past, R&D was more centralized in the corporate center in Germany. But more and more we've started to create R&D centers all over the world. The last one we opened was in Qingdao, in China, where we have a cooperation agreement with universities in the rubber area. Here in Brazil, we have research programs at Lanxess Elastômeros [formerly Petroflex]. Therefore, we are trying to make an international research base, as from continent to continent the applications in the areas are different and we have local specificities. Therefore, it is absolutely essential to tailor theses products according to local demands.

BNamericas: Does Brazil play an important role in the Lanxess global R&D?

Breuers: It plays a growing role and it's important for the company's future.

BNamericas: The amount to be invested in R&D this year is 10% higher than in 2008. Didn't the crisis have any influence on Lanxess' intentions to invest in this area?

Breuers: Absolutely not. There are two areas in which we should constantly focus: one is human resources and the other is R&D. These are long-term goals that you cannot simply switch on and off. We believe that if Lanxess wants to be competitive and play a leading role in the future, we need to have a strong R&D base and we need to come up with innovative products and solutions. That's why we not only kept our R&D budget, but increased it over the last three years.

The biggest increase is coming from the recent establishment of an innovation group. We are following mega-trends and, for example, doing research in nano-particles for rubber, which lowers tire rolling resistance. With this new product, the tire creates less noise and at the same time reduces fuel consumption by around 10%. So you can imagine the impact on the carbon dioxide emissions.

The other area on which we're focusing is processing engineering and energy savings. So you spend more in R&D but you gain a lot by saving energy in the production processes around the world.

BNamericas: Do you have other current projects regarding development of sustainable solutions?

Breuers: The most important, besides energy savings, is the research for a new base of raw material. We do have projects in this area, but they are in a premature phase. As you can imagine, it's not easy, but you need to start and be in the game as natural resources are limited. You can debate when they will run out so it's better to prepare yourself today. For example, last year the hike in the price of oil, which reached almost US$150 a barrel, was a result of high demand and production that cannot keep pace with this demand.

We are looking, for instance, for alcohol routes, beginning from butane and butanol, and then from butanol to butadiene, which is the raw material for synthetic rubber.

BNamericas: Lanxess is currently constructing in Brazil a sugarcane bagasse co-generation energy and steam plant. What motivated Lanxess to invest in a project like this in the country?

Breuers: First of all we are always looking for sustainable solutions and that's why we have just created this new group for innovation. In addition to looking into the bio-feedstock area, and maybe in the future we could produce our chief raw materials from bio-sources, we are always interested in sustainable power and here Brazil is actually competitive. The project here fulfills the required conditions, as it is both environmentally friendly and also financially attractive.

BNamericas: Do you have similar projects in other locations?

Breuers: Yes, we have a co-generation power project in India, but it's based on peanut shells while in Brazil it is based on sugarcane bagasse.

BNamericas: In 2008, 16% of Lanxess' global revenues were generated in the BRIC countries. Do you expect that percentage to increase this year?

Breuers: I think it will grow significantly. The BRIC countries are recovering much faster from the financial and economic crisis than the traditional Western countries and this is leading to a shift in sales toward these countries.

BNamericas: So do you expect the BRIC sales to represent more than 16% this year?

Breuers: Absolutely. I expect something around 20% or more.

BNamericas: What is Brazil's share of this figure?

Breuers: Brazil represents about 7-8% of the revenues globally.

BNamericas: How are the markets in Brazil responding to the global economic slowdown that ended up impacting Lanxess' revenues? Do you expect any improvement in Brazil?

Breuers: In general I would say Brazil is doing better than the Western countries. However, that is not due to the rubber products that mainly go into the car and tire industries, which have been heavily affected in Brazil. But we see the situation stabilizing in Brazil and we see figures slowly recovering. But this is less dependent on Brazil and more on global demand.

BNamericas: Is production of synthetic rubber in Brazil focused on the domestic market or is it also exported?

Breuers: Approximately 50% of our production in Brazil is exported.

BNamericas: To where?

Breuers: Mainly to North America, the Nafta region, and also to Europe.

BNamericas: How have exports from Brazil been performing? Have they slowed down as well?

Breuers: They have slowed down, but we have found new export opportunities, given the Asian markets have been recovering faster we have directed our rubber sales to that region, especially South Korea and China.

BNamericas: And how is the competition with the local producers in those countries?

Breuers: We have faced stiff competition there. As I said, it is necessary to have competitive feedstock in Brazil, otherwise we cannot compete elsewhere.

BNamericas: How is the cost saving package Challenge09 impacting operations in Brazil and Latin America?

Breuers: I think it is affecting all our subsidiaries around the world. Lanxess is well known for responding quickly to new challenges. The crisis started around September and October last year and by December we had already implemented our program, Challenge09.

We've had global cooperation from our affiliates with savings in personnel costs, from top to bottom, and salaries have been reduced by 10%. Cost savings are also being applied in the plants, supply chain and logistics. We have achieved important savings and therefore decided to extend the program to the Challenge12 package. We are talking about cost cuts worldwide of 250mn euros through 2010.

In addition, the program has been extended because we don't expect the economy worldwide to improve so much over the next two years.

BNamericas: How do you expect Brazilian sales to perform this year?

Breuers: We have been all hit hard by the crisis, including Brazil. We'll see lower sales figures this year across the board.

ABOUT THE COMPANY:

Lanxess manufactures high-quality products in the areas of specialty chemicals and intermediates, synthetic rubber and plastics. In 2008, the company, which is listed on the Frankfurt stock exchange, reported sales of 6.58bn euros worldwide.

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