Opportunities, risks and outlook

Significant opportunities and risks

There have been no significant changes in the opportunities or risks of the LANXESS Group compared with December 31, 2013. Further information on this topic is provided in the combined management report for LANXESS AG and the LANXESS Group of the Annual Report 2013. Based on an overall evaluation of risk management information, the Board of Management at the present time cannot identify any sufficiently likely risks or risk combinations that would jeopardize the continued existence of LANXESS.

Future perspectives

LANXESS continues to anticipate that the global economy will slowly recover during the remainder of the year. The positive economic development in the established economic regions is expected to continue, while slightly slower growth is expected in the emerging economies.

The predicted growth rate for China, at 7.5%, is within previous expectations, while the forecast for the United States has been slightly lowered to 1.5%. In our view, Europe will also develop as anticipated, with economic growth of 1.5%. In the Latin America region, on the other hand, we predict significantly weaker growth for Brazil in 2014. The flashpoints in the Middle East and the ongoing political conflict in Ukraine pose substantial risks to economic development. Growth could also be held back by the difficult financial situation that continues to confront European governments and banks and by the distressed loans on the balance sheets of Chinese banks.

We believe that production in the chemical industry will continue to increase and that this development will be robust. Momentum in the emerging markets will likely remain strong, with China the focus of this growth. Somewhat weaker growth of 2.5% is forecasted for the United States, while EMEA should develop in line with existing expectations at 1.5%.

As regards our customer industries, we currently predict slightly weaker growth for automotive production due to the impact of the tensions in Ukraine and political instability in Thailand, along with economic weakness in Brazil. Against this background, the growth forecast has been reduced from 5% to 3.5%.

We anticipate positive development in the tire industry, mainly in light of the development of the replacement-tire market. As growth in automobile production is likely to be weaker, however, the forecast has been slightly reduced from 4% to 3.5%. Despite the crisis in Ukraine, production in EMEA is likely to expand by 2%, while a modest increase in tire industry growth to 9% is now predicted in the Chinese economic region. Development in the United States should be in line with the original forecasts.

Market demand for agrochemicals is likely to continue developing robustly during the remainder of the year.

We assume there will be further growth in the construction industry in the coming quarters, though there will probably be regional variations. EMEA will likely continue to grow, and we expect somewhat weaker growth in China. Residential construction remains very strong in the United States. At the global level, however, infrastructure investment is expected to grow significantly more quickly than residential construction.

We anticipate the following developments for our businesses over the further course of the year:

We foresee a persistently challenging competitive environment and continuing pressure on prices in our synthetic rubber businesses, which are closely linked with the automotive and tire industries. As a result, we predict restrained development to continue in the coming months in our Performance Polymers segment, particularly for its synthetic rubber business units.

In the agrochemicals business, we expect demand to continue developing well for the remainder of the year. We believe the business units in our Advanced Intermediates segment will benefit from this situation and continue their positive development.

The forecasted growth in the construction industry should provide further positive impetus for our pigments business in the Performance Chemicals segment, leading to good development there.

Following the completion of our growth project in Antwerp at the end of the second quarter, our investment will focus on the implementation of our further growth projects in China and Singapore, which are already well advanced. Cash outflows for capital expenditures are expected to be at about the prior-year level in 2014 due to these projects. After completing these facilities, we plan to focus our future spending on maintenance and efficiency improvement measures, reducing the level of capital expenditures.

We continue to anticipate that EBITDA pre exceptionals will show a year-on-year improvement in 2014. We are narrowing our earnings guidance and now anticipate that we will achieve EBITDA pre exceptionals of between €780 million and €820 million in 2014.

LANXESS has initiated a realignment program to restore the Group to significantly greater competitiveness and profitability. This program is aimed at enhancing administrative structures and decision-making processes and further improving customer and market focus in the business units.

We had already announced that we are developing measures to reduce costs and improve the Group’s competitiveness when we published our results for the first quarter of 2014 at the beginning of May. We will provide further details of the restructuring program during the second half of 2014.

Further information on this topic is given in the combined management report for LANXESS AG and the LANXESS Group in chapter "Future perspectives" of the Annual Report 2013.