A fall in demand from the pharmaceuticals industry has caused a significant hole in 2003 profits for German chemicals group Degussa, which implemented heavy restructuring to reduce production capacity in its fine chemicals unit.
The company said it would take a €500 million impairment charge for the Fine Chemicals business unit in last year's third quarter to better cope with the cyclical drop in demand in the pharmaceuticals and agrochemicals sectors.
The chemicals industry across Europe has been facing global overcapacity and heavy price pressure, with a number of Degussa's competitors also carrying out cost-cutting measures during 2003.
The restructuring led to the creation of two separate fine chemicals business units, announced at the CPhI conference in Frankfurt last November. One focuses on exclusive synthesis and catalysts, and the other on chemical intermediates. But it also involved closure of a site in Radebul and extensive restructuring at other sites in Germany, the UK and the US. This caused a 3 per cent decline in fine chemical sales to €940 million for the year and significantly lower earnings.
It also played a significant role in the group's losses of €159 million, compared to profits of €227 million the previous year.
Sales were also down across all other business units (by 3 per cent overall) to €10.7 billion and higher raw material costs and currency effects have eroded margins. EBIT (earnings before interest and taxes) came to €902 million, down 5 per cent from the previous year's level of €953 million.
Degussa chairman Professor Utz-Hellmuth Felcht said however that prompt action to counter the difficult economic trends helped 'to limit the decline in sales and EBIT'.
He added: "The strength of the euro is continuing to affect our business but there are initial signs of a cyclical upturn. We therefore expect our core businesses to report a slight improvement in sales and EBIT compared with 2003. All divisions should contribute roughly equally to this."
The company also said today it will make better use of biotechnological production processes, with around €20 million slated for investment in the new ProFerm Project House in Hanau, Germany, over the next three years. The centre will develop novel microorganisms and fermentation processes for the whole group, making use of a network of external partners such as universities and biotechnology companies.
"We aim to become even stronger in biotechnology in future as this is a field that provides us access to innovative products and new business," commented Felcht.