Optimism Springs Eternal - 2011 was a year fraught with uncertainties, and many industries are wearily eyeing the year to come. The state of the worldwide economy as well as the health of the 10-year-old euro has many concerned about what the next months will bring. However, reports from mainstream media seem to differ from the mood within the chemical industry. Here, the outlook is overwhelmingly positive; the sector went through a lot of changes after the crisis that began at the end of 2008, and most in the industry are ready to face any challenges ahead.

Brandi Schuster spoke to Saltigo CEO Wolfgang Schmitz; Andreas Stolle, Pharma business head; and Dirk Sandri, head of Marketing & Sales in the Agro & Fine Chemicals business line, about the year ahead in pharma, agro and custom manufacturing in general.

CHEManager Europe: What is Saltigo's outlook for the coming year?

Wolfgang Schmitz: We are expecting positive perspectives for our agro business this year, and this is where we plan on sharpening our focus. In fact, we have already booked orders for the first half of the year. The majority of our agro customers - and among them the major players - have positive expectations for the coming year. The positivity is also underscored by prices on the commodity bourses in Chicago and Kansas - we're looking at prices that are similar to those in 2008, which clearly shows that the long-term dynamic is intact.

Mr. Sandri, what trends have you been seeing in the agricultural sector?

Dirk Sandri: The agrochemical sector has been very bullish in comparison to many other industries lately. Forecasts show that the end market will have grown by 16-18 % in dollar terms in 2011, which is a very positive signal. And the first signals for 2012, at least for the first half, also look very promising. Our customers are optimistic about developments in various markets, particularly in Eastern Europe, Asia and Brazil.

Mr. Stolle, what about pharma?

Andreas Stolle: Within pharma, we expect to continue to face hard competition. Compared to agro, it's a more difficult business environment, so we are more cautious. We've been observing ongoing consolidation on the demand side, which is leading to an impressive amount of price pressure in the industry. For our part, Saltigo has been successful in improving its pipeline with drugs in late stage of development where we are now preparing for production of launch quantities.

Has the euro crisis affected your parent company Lanxess?

Wolfgang Schmitz: The construction and electronics sectors have been affected in the second half of 2011, but Lanxess is overall on track to achieve record results for 2011 of €1.1 billion EBITDA pre exceptionals.

Many companies have come up with a contingency plan should the euro fail.

Wolfgang Schmitz: On our financial side, Lanxess has done its homework. We have a balanced financing portfolio and a good maturity profile. This is also reflected by solid long-term investment-grade credit ratings. All this means, we have the ability to pursue our growth strategy of achieving €1.4 billion EBITDA in 2015 through organic and external growth measures.

Many chemical companies have a positive outlook for 2012, despite gloomy economic reports. Is the euro collapse really as possible as it seems, or is a lot of the debate around the currency the result of media hype?

Wolfgang Schmitz: In fine chemicals, people are quite optimistic and predict strong performance for the coming year. As far as the stability of the euro is concerned, it's also something of a psychological issue. If people talk and talk about the dangers and what to do when it collapses, this inevitably leads to more and more people thinking that it will indeed collapse. This is not something any of us want. We see quite positive chances for us to grow further, and this is what we're primarily concentrating on. And we shouldn't forget how many advantages the euro has brought to German, export-oriented companies like Lanxess.

Given the economic state of the world right now, do you see any parallels to the end of 2008 beginning of 2009 at the end of 2011 beginning of 2012?

Wolfgang Schmitz: In 2008, the entire industry was taken by surprise. Orders practically ceased overnight, and this was after the entire supply chain was underway full blast, expecting a good year. It was as if a reset button had been set, and this forced everyone to reconsider the way they do business. In 2009-10, industries thoroughly investigated their supply chains and dramatically reduced the money they had bound as working capital, particularly on the raw material side. This means customers are now much more cautious about the amount of product they order. In the past, customers wanted the security of knowing that they had enough material on hand. Now, many have redefined the level of inventory they need to keep.

What does this mean for the current economic situation? If demand were to go down now, the effect will not be as abrasive as it was in 2008 because everyone has now prepared, step-by-step, for such a situation. Companies are now better prepared to take on any uncertainties, although obviously no one knows what is to be expected in the coming months.

Dirk Sandri: In agro, we have seen that customers are much more hesitant than they have been in years past. We had a lot of new capacity come on stream when the demand was down, so people are naturally conservative nowadays. If the first half of 2012 develops better than predicted, then we can expect new investments to follow.

So the industry is better positioned now at the beginning of 2012 than at the end of 2008?

Wolfgang Schmitz: I would definitely say so, but we still don't know if the turbulences in the financial market will fully make their way into the real economy.

What will be setting the tone in 2012 in custom manufacturing?

Andreas Stolle: The euro crisis and the patent cliff in pharmaceuticals will move pharma companies to consider further cost savings. Some of these savings will need to come from their procurement organizations, which means suppliers will be expected to be even more creative and innovative when it comes to supply-chain simplification and cost cutting. This means there is a fierce competition between all custom manufacturers to stay in the game and protect the business. With our portfolio and pipeline, we focus on innovative processes to stay competitive.

In the end, though, it's all about how a company can bring cost cutting to the table while improving the service at the same time. This is a trend that's here to stay in 2012.

How can a company cut costs while improving products?

Andreas Stolle: Saltigo has its strengths in chemistry, technology and engineering. We are continuously improving our processes and coming up with new engineering solutions. It is not just continue what we do. We are targeting step changes and focus on our key strength. That is driving down cost in the processes that we have established in the plants and, of course, looking at different supply chain options.

Do you see that a lot of your customers are looking to Asia as an alternative to save money?

Andreas Stolle: It depends on the customer. Some have a dual supply strategy of going to Asia while also staying in Europe. Then there are companies who will go where ever the best prices can be found - and it should be said that there are good Asian companies out there who are very competitive. Others will only source very early intermediates in Asia while preferring to do the high-value adding steps in Europe. Again, it all depends on the customer, the company philosophy and perhaps even individual experiences in different regions.

How do you sell Europe to companies who are seemingly only concerned about the bottom line?

Andreas Stolle: We make them aware of the need to look at the total cost of supply. It could be that companies can save money on production in Asia, but this is without taking the overall cost and security of supply as well as total value for money into consideration.

Wolfgang Schmitz: I think this is also especially valid for a project up to the launch phase where safety and speed of supply are very important. This is where many customers prefer to rely on Western suppliers.

Dirk Sandri: In agrochemicals, we have seen a significant takeoff for products in Asia last year. In some cases where we have supplied Asian customers with raw materials, we have seen these demands shift partly back to Europe.

Why?

Dirk Sandri: It is definitely a quality issue; price isn't everything. You can have a nice low price, but you need a material in the right quality, in the right quantity, in the right packaging, at the right moment. And since there is a high volatility in demand planning of our customers, and because their main production units are in Europe and in the U.S., they don't have time to wait for weeks for materials from China or from India to Europe back and forth. So this is definitely an advantage also for European suppliers that we can offer a short-notice supply.

Mr. Stolle, it's no secret that the pharma industry is booming in Asia. How do you accommodate customers who want to expand into this region?

Andreas Stolle: In this case, we help customers indirectly. We are constantly analyzing how to stay competitive and how to support the costs of goods needed in the Asia market. We can do that either through our technology or we can investigate sourcing from countries with less intensive labor costs in order to keep the overall cost down.

Many pharma companies want to build a physical presence in Asia, but they have difficulties going it alone and look to contract manufacturers to help them get a foot in the door. How do you assist these customers?

Andreas Stolle: Some customers ask directly, "Why should I use Saltigo to do this?" In some cases, we take care of all of the sourcing and supply chains, which means we can reach out through our Saltigo and Lanxess procurement departments in Asia. This helps customers to manufacture on a global basis.

Is this something that has been gaining in popularity?

Andreas Stolle: I would say yes. However, there are a few companies who go into these regions directly.

Wolfgang Schmitz: It's a case-by-case situation. In companies that have been reorganized, procurement departments have also become smaller. This means they end up concentrating on their first-tier suppliers and expect them to organize the entire supply chain instead of doing it themselves.

Your customers expect Saltigo, as a contract manufacturer, to be an all-round service provider.

Andreas Stolle: That is absolutely right. It's not just about manufacturing anymore; it's also about the entire service package.

As a custom manufacturer, do you see that the pharma companies regard you as a partner in the collaboration?

Andreas Stolle: It depends on how intimate we are with the customer. The smaller the company, the more intimate the collaboration usually is. This is particularly true with emerging pharma companies; there we are really a part of their team, and innovation in the pharmaceutical sector is coming out of these emerging companies. Some Big Pharma companies just give us an order and we deliver accordingly. That being said, I have seen a clear trend that many pharma companies are beginning to see the value customer manufacturers have to offer, particularly when it comes to innovation.

Do you see that Big Pharma is having a kind of problem making this change in mindset?

Andreas Stolle: It is indeed a change in mindset, and that is something that many people need years or even generations to do.

The much-prophesized patent cliff is upon us - do you think that will be the real catalyst for getting Big Pharma to change the way they do business?

Andreas Stolle: I think it is more than that. Of course the patent cliff plays its part, but a weakening euro and the international debt crisis - as well as the crisis that began at the end of 2008 - are also making people think. Also, the drug prices to be achieved in emerging markets are typically lower than in Western countries. This all drives Big Pharma to change the way they do business, and it's a process that starts from the top down. A lot of CEOs have already recognized the need for change. This line of thinking flows down to the procurement level, where they realize they need partnering in order to get more value out of collaborations.