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Opportunity report

Strategic opportunities

We intend to maintain LANXESS’s proven strategic alignment in the future. Our product portfolio is systematically aligned to those markets that promise growth in the coming years. The BRICS countries – especially Brazil, China and India – will retain a central role in this regard. In the future too, we will be positioning ourselves as a flexible, market-facing premium supplier at the core of the chemical industry that is applying its great innovative capability to generate measurable added value for its customers.

Our medium-term objective is to increase our key controlling parameter, EBITDA pre exceptionals, to €1.4 billion in 2014 and €1.8 billion in 2018. We aim to pursue these goals on the basis of organic growth and targeted acquisitions, with the focus on organic growth.

Strategic projects in support of organic growth, the composition of our product portfolio, our regional focus, acquisitions, and targeted research and development will be instrumental in helping us achieve these earnings targets.

Product portfolio aligned to four global megatrends

With its product portfolio, LANXESS has a presence in all key customer industries. Our broad diversification of this portfolio ensures that we are not dependent on any single product or process. We are focused on strengthening the individual product segments with optimized production processes and methods, ongoing innovation, capacity expansion measures, new production facilities or acquisitions. Our work in this regard is aligned to the global megatrends that are most relevant to us:

Mobility: The increasing demand for vehicles, especially in the emerging economies, and the need to improve the environmental compatibility of mobility throughout the world are providing key impulses for growth in tire production and automotive engineering, both of which are important user industries for LANXESS. At both European and international level, current and draft legislation seeks to improve quality standards by requiring the classification of vehicle tires on the basis of their rolling resistance, wet grip, noise emissions and durability. A good rating can only be achieved using high-performance rubber. In automotive engineering, it is above all the efforts to achieve substantial weight reduction through the increased use of high-performance plastics that are providing us with opportunities for growth.

Agriculture: The rising world population is driving the demand for agricultural products. The need in agriculture for more efficient use of limited arable land is a crucial issue for our customers in the agrochemical industry. Our products help protect crops and increase agricultural yields.

Urbanization: Urban expansion and the emergence of new megacities can be observed especially in the fast-growing newly industrialized nations such as Brazil, China and India. The need for new buildings and an efficient infrastructure is correspondingly large. Moreover, demand for better consumer goods and a higher standard of living is evolving with the growing middle class in these countries. We are benefiting from this trend through our customers in the construction and consumer goods industries in particular.

Water: Given escalating environmental pollution and the steady rise in water consumption because of ongoing population growth and industrial requirements, the demand for clean water will continue to rise. With our innovative solutions for purifying and treating drinking water, wastewater and industrial process water, we are therefore serving a high-growth market.

Sustainable expansion in the BRICS countries

In recent years, we have substantially strengthened our business activities in Asia, Central and Eastern Europe and Latin America and will continue to expand our market positions there in the future. Our growing presence in these key economic regions will enable us to participate in their dynamic economic development. Last year, we laid the foundation for further growth in Asia, in particular, by making selective investments in China and Singapore.

Strengthening the Group through acquisitions

We are not planning to make any fundamental changes to our corporate structure and business policy in the coming years. However, strengthening our segments through selective acquisitions will remain an important element of our strategy.

Focused research and development activities

We make targeted investments in the research and development of new solutions that underscore the premium nature of our products and generate added value for our customers. We intend for customer- and market-oriented innovations to continue helping us achieve organic growth and cementing our competitive positions as a premium supplier. Process and product innovations remain the focus of our research and development activities.

The importance of research and development work is also reflected in our R&D budget for fiscal 2013, which exceeds the actual expenditure for the reporting year by a good 10%.

Operational opportunities

Unlocking and exploiting operational opportunities is an important aspect of LANXESS’s entrepreneurial activities. We are committed to using existing products and new solutions to systematically advance our growth and sustainably strengthen our position in global markets. Investing in new plants and increasing the productivity of existing ones are key elements for future organic growth.

In the year under review, we strengthened the basis for further growth in the coming years by making selective investments in our existing businesses and developing innovations that support, for example, the mobility and water megatrends.

As planned, we will be bringing our new butyl rubber plant built in Singapore for the Butyl Rubber business unit of our Performance Polymers segment on stream in the first quarter of 2013. The facility is designed to have an annual capacity of up to 100,000 tons. This new capacity will enable us to meet the medium- and long-term growth in demand for butyl rubber for tires, particularly from the BRICS countries. The investment volume of the new facility is about €400 million.

Also in Singapore, LANXESS started construction in September 2012 of a new production facility for high-performance neodymium-based performance butadiene rubber (Nd-PBR) for the Performance Butadiene Rubbers business unit. Investment in the new plant on Jurong Island will total around €200 million. The facility, which is due to come on stream in the first half of 2015, will be the largest of its kind in the world, with an annual capacity of 140,000 tons.

In the key Asian growth market China, we are investing around €235 million in the construction of the world’s largest production plant for EPDM synthetic rubber. Assigned to the Technical Rubber Products business unit (since January 1, 2013: Keltan Elastomers business unit), the plant will have an annual capacity of 160,000 tons and is due on stream in 2015. We broke ground on the new facility in September 2012.

With the construction of a new polymerization plant in Antwerp, Belgium, which has an investment volume of about €75 million, our High Performance Materials business unit is strengthening its production network for high-tech plastics and will be in a position to supply its global compounding network from the site. Antwerp is also home to the facility for caprolactam – the key precursor for plastics manufacturing – and glass fiber production. The new polymerization plant is due for completion in the first quarter of 2014 and is designed for an annual capacity of 90,000 tons of polyamide.

With our Advanced Industrial Intermediates and Saltigo business units in the Advanced Intermediates segment, we are well-positioned in the market to meet the growing demand for agrochemicals that is rooted in the agriculture megatrend. We aligned our Saltigo business more strongly to the agrochemicals business last year. In addition, following the completion of capacity expansions for menthol and dichlorobenzene production in the reporting year and at the beginning of 2013, the Advanced Industrial Intermediates business can offer the market further capacities to serve the long-term demand trend.

A number of measures have resulted in operational opportunities for the business units in our Performance Chemicals segment. For instance, the Inorganic Pigments business unit started constructing a new facility for iron oxide red pigments on the east coast of China, marking an expansion of its global production network for inorganic pigments. Designed in line with state-of-the-art environmental standards, the plant will have an initial annual capacity of 25,000 tons. Production is scheduled to start in the first quarter of 2015. The investment volume is about €55 million.

The Rhein Chemie business unit will further strengthen its position in the market for vulcanization bladders through the acquisition of U.S. company Tire Curing Bladders, LLC, in the year under review. In the Ion Exchange Resins business unit, which supplies products in support of the water megatrend, we have successfully established ourselves as an end-to-end supplier for water treatment solutions following the market launch of our membrane technology.

In the first half of 2013, our Leather business unit will commission its new production plant for leather chemicals in China, which is the world’s largest market for leather chemicals. At a cost of about €30 million, the new plant will have an annual capacity of up to 50,000 tons. In the second half of 2013, this business unit is also due to commission our new CO2 concentration unit in South Africa, thereby strengthening our value chain in this business area. The investment volume for the new unit amounts to €40 million.

The development of innovative products and ongoing development of our production processes play a significant role in cementing our current market position and increasing our competitiveness.

In the Keltan Elastomers business unit, for example, we are using the sustainable advanced catalyst elastomers (ACE) technology in the production of our EPDM synthetic rubber. Compared to conventional technology, ACE reduces energy requirements for rubber production and does not require catalyst extraction as a result of high catalyst efficiency. Furthermore, it enables the manufacture of new rubber grades, which will allow us to expand our EPDM portfolio and align our products even more closely with customers’ specific needs. We will deploy the ACE technology at our EDPM plant currently under construction in China. At our site in Geleen, Netherlands, which previously ranked as our largest EPDM facility, we will be converting 50% of the production capacity, or some 80,000 tons, to ACE technology this year.

Sustainability is not just about production processes at LANXESS. Our commitment to sustainability starts with raw material sourcing, which is why we actively search for alternative sources of raw materials for our businesses. In our rubber business, for example, we successfully developed a dehydration process for producing ethylene from sugar cane. Since the end of 2012, we have been using this bio-based ethylene as a substitute for ethylene derived from petroleum to produce EPDM rubber at our site in Brazil. We intend to gradually expand our use of bio-based raw materials in the Keltan Elastomers business unit in the coming years and are researching sustainable feedstocks for our other business units as well.

For the important mobility megatrend, our High Performance Materials business unit is developing innovative lightweight construction solutions. Our new composite material systems made from high-performance plastics can replace metal parts used in motor vehicles, thereby reducing fuel consumption and emissions. We can produce highly durable and resistant components for vehicle manufacturers, especially structural body parts made from composite sheets containing our high-tech plastics. These replace critical vehicle components that were previously made from metal, including the front end, brake pedals and various housings, like the airbag housing. In developing these innovations, we work closely with leading carmakers on customized solutions for each vehicle model. Our acquisition of Bond-Laminates GmbH in September 2012 has reinforced our position in this promising field. Bond-Laminates makes composite sheets that combine thermoplastics and high-strength fibers. With this step, we have gained additional expertise in the cutting-edge field of lightweight construction and can now offer the development and production of these composite systems from a single source.

Our Ion Exchange Resins business unit expanded its portfolio of custom-tailored solutions for the water megatrend. Thanks to the commercial launch of membrane elements for reverse osmosis in the reporting year, we have successfully established ourselves as an end-to-end supplier in the market for water treatment solutions. We have enhanced our competitive position by becoming one of two companies to offer products for ion exchange and membrane filtration. We are steadily adding innovative products to our portfolio in the important area of reverse osmosis membranes, which are used in the desalination of brackish water in many industrial applications, including, for example, the production of boiler feed water for power stations. The new membrane elements were designed to reduce the accumulation of particles on the membrane surface during industrial water treatment operations, thereby extending maintenance intervals.

Expected results of operations of the LANXESS Group

LANXESS has defined clear medium-term earnings targets. We aim to achieve an EBITDA pre exceptionals of approximately €1.4 billion in 2014 and, as a second mid-term growth target, an EBITDA pre exceptionals of €1.8 billion in 2018.

Given the ongoing macroeconomic uncertainty related to the European financial crisis, our ability to make concrete earnings projections for 2013 is limited. Despite the challenging economic environment we anticipate for the first half of 2013, in particular, we are confident that we will achieve our first medium-term earnings target of €1.4 billion in EBITDA pre exceptionals in 2014.

For the Performance Polymers segment, we expect the demand for tires to come mainly from the Asian growth markets China and India in 2013. We also expect demand to be lifted by the new European directive on mandatory tire labeling, which came into force in the E.U. in November 2012, and by other global labeling regulations in, for example, Korea and Japan. In our opinion, these factors will also contribute to a continued increase in the demand for tires with optimized rolling resistance, which can be manufactured thanks to our high-performance rubber products.

Our global production network and long-standing customer relationships put us in an excellent position to profit from this trend in our rubber business. Over the course of 2013, we will start to supply the fast-growing Asian markets directly from our butyl rubber plant in Singapore, which will come on stream in the first quarter of 2013 as announced. We see further growth opportunities for our high-tech plastics because of the ongoing trend to reduce vehicle weight. We are also well-positioned in this market, in part because of the aforementioned acquisition of Bond-Laminates.

In the Advanced Intermediates segment, we forecast good demand for our agrochemical products in 2013, in both the Advanced Industrial Intermediates and Saltigo business units.

In Performance Chemicals, we expect the demand for products for the construction industry to increase in 2013, especially in North America and China. We see growth opportunities for the current year in the Ion Exchange Resins business unit, which supplies products in support of the water megatrend, due to solid demand for ion exchange resins and the market success of our membrane technology. Growth opportunities for the Leather business unit in 2013 may come from the startup of our new production plant in China.

Expected cost development of the LANXESS Group

LANXESS has been swift to respond to the challenging economic conditions, introducing measures in the reporting year to counter the effects of declining demand. We will continue these efforts, which include flexible asset management and rigorous cost discipline, in 2013. In the course of the last few years, against the backdrop of the global economic and financial crisis, we have further flexibilized our cost base and, if necessary, are now in a position to adapt our costs to changes in the economic environment at an early stage.

We believe that our cost base will be higher in 2013 than in 2012, partly as the result of the higher depreciation expense attributable to the startup of new production facilities as well as to the increase in wages and salaries to be expected from pending collective bargaining agreements.

We project depreciation and amortization of between €420 million and €440 million in fiscal 2013. With respect to raw material costs, we expect continued volatility at a comparatively high level in 2013. As in previous years, we will seek to pass on rising costs to the market by adjusting our product prices. Since raw material prices are expected to be volatile, we are very limited in our ability to make a medium-term forecast for our raw material costs. However, we are generally assuming that price trends for the individual strategic raw materials will vary and that the trend toward higher procurement costs, particularly for petrochemical raw materials, will continue, with corresponding volatility. We believe energy costs are likely to increase slightly in 2013.

Exchange rate fluctuations may impact our earnings. We have already entered into hedging transactions to ward off the effects of such developments in 2013 as well as 2014.

The effective tax rate for the LANXESS Group is significantly influenced by the regional distribution of its earnings. Accordingly, we expect a tax rate of about 22.0% for the medium term, but the rate for 2013 could be slightly higher.

Expected financial condition of the LANXESS Group

Liquidity situation

LANXESS will continue to pursue a forward-looking and conservative financial policy. With more than €2.3 billion in cash and undrawn credit lines, as described under “Financial condition,” we have a very good liquidity and financing position which will enable us to fund our selective growth strategy.

Capital expenditures

We will continue to pursue our investment and growth strategy in fiscal 2013. Around 70% of cash outflows for capital expenditures will relate to the expansion of existing plants or the construction of new production facilities. The remaining 30% will be used for the maintenance of existing LANXESS production facilities. We are projecting cash outflows for capital expenditures of €650 million to €700 million for 2013, which is in line with the previous year. We expect an investment volume of around €65 million in 2013 for our new Nd-PBR production facility in Singapore and about €100 million for our EPDM rubber plant in China.

Financing measures

The financing for the planned capital expenditures and the expected dividend payment is ensured by future cash flows, available liquidity and existing lines of credit. LANXESS is in a strong position due to the long-term nature of its financing. There is no significant need for refinancing this year on account of the extensive measures we have adopted to date to improve our financial position. In addition, LANXESS will continue its efforts to secure long-term funding as part of a conservative financing policy by further diversifying its financing sources and implementing forward-looking financing measures.

Expected results of operations of LANXESS AG

We expect the administration expenses that LANXESS AG incurs in performing its tasks as a management holding company to increase slightly in 2013 and 2014. Apart from this, the earnings position of LANXESS AG will be dominated by the financial result, especially the net interest position and the balance of income and losses from investments in affiliated companies. In 2013 and 2014 we expect the net interest position to be negative and the balance of income and losses from investments in affiliated companies to come in at a level that puts the net income of LANXESS AG on a par with the reporting year. The ability of LANXESS AG to pay a dividend will depend in large measure on the profit transfers and dividends paid by the other companies of the LANXESS Group.

Dividend policy

LANXESS follows a consistent dividend policy. As in the past, our future dividend proposals will take into account the business performance of the relevant fiscal year, the Group’s financing goals and development trends in the new fiscal year.

Summary of Group’s projected performance

The LANXESS Group is successfully positioned with its product portfolio in the relevant markets and will continue to expand its presence in the world’s growth regions this year. We aim to strengthen our market position, especially in the BRICS countries, even though it is assumed that there will be little economic momentum in 2013. We have set clear medium-term growth targets that we aim to achieve through organic growth as well as selective acquisitions. It is planned to raise the Group’s key controlling parameter, EBITDA pre exceptionals, to approximately €1.4 billion in fiscal 2014. In addition, as announced during the reporting year, we aim to achieve an EBITDA pre exceptionals of €1.8 billion in 2018. To reach our goals, we will continue to pursue our price-before-volume strategy and to focus on offering premium products.

There are certain company-specific factors that can influence LANXESS’s future business performance. One key factor is the future development of raw material and energy costs. We expect the trend toward higher procurement costs to continue throughout 2013 and, from today’s vantage point, see no fundamental change in the trend thereafter. We intend to continue to pass along the volatility in raw material and energy prices to the market by making price adjustments.

The U.S. dollar will remain the key currency for LANXESS’s businesses. We expect this currency to remain volatile against the euro in 2013, moving within the range of US$1.25 to US$1.40.

As global economic momentum is expected to stay slow, we are cautiously optimistic for 2013. We believe that Asia will post the largest year-on-year gain among the growth markets.

We expect customer demand to stay at a low level in the first quarter of 2013, consistent with the end of the reporting year. For this reason, we think that the situation will be particularly challenging in the first quarter. We predict that there will be a gradual improvement in the demand situation during the second half of the year.

LANXESS was swift to start introducing measures last year that have helped the company successfully counter the effects of declining demand. These measures include flexible asset management and our rigorous cost discipline. We will continue to apply these measures in 2013 in light of the economic challenges. In addition, we believe that all our segments are well-positioned to benefit from an improvement in business conditions during the year.

Against this background, we are confident of continuing to grow over the coming years and of achieving our mid-term target of €1.4 billion EBITDA pre exceptionals in 2014.

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