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Big Chem spends billions on elaborate stock buyback schemes — but still asks for public funding
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Chemical Industry

Big Chem spends billions on elaborate stock buyback schemes — but still asks for public funding

Published on 18 Jan 2023

European chemical companies say they need public funding to develop safer alternatives and stop producing hazardous chemicals. But, at the same time, they spend billions of euros buying back their own shares to boost stock prices.

In a time of environmental and geopolitical crises, the issue of how Europe’s industries should be made more resilient and sustainable is at the top of the EU agenda.

As a result, several industry-specific discussions for so-called transition pathways, roadmaps for how each industry ecosystem should be made more “green and digital”, are already underway.

In the coming weeks, a transition pathway for the chemical industry will be presented at an EU Commission roundtable (where ChemSec will have a seat).

The following discussion will revolve around the roadmap towards sustainability for Europe’s chemical industry.

“European chemical companies think that EU member states should pay for developing safer alternatives”

If we are to believe industry spokespersons, they relish the challenge and the opportunity.

“The next generation of chemicals that are safe and sustainable by design is set to be a growth engine for Europe”, says Marco Mensink — head of the European Chemical Industry Council (Cefic) — in a recent interview with the Financial Times. 

“But developing them is where public funding should come in”, he concludes.

That’s right. The big European chemical companies think that the Commission and the member states should pay for the developing costs of safer alternatives.

This may be due to the economic pressure the industry is already experiencing. Martin Brudermüller — President of Cefic (and CEO of chemical giant BASF) — seems to think so as he laments the low growth rates in Europe in another Financial Times interview

“Instead of reinvesting profits to improve its business, the company buys back shares from its owners”

So, what is this strained industry spending its money on if it so desperately needs government money to be more sustainable and keep up with the times?

“Stock buybacks”.

Here’s how it works. Instead of reinvesting profits in the company to improve its business — for example, developing safer alternatives — the company buys back shares from its owners and then terminates them (the shares, not the owners).

This leaves a reduced number of outstanding shares on the market, which boosts the short-term stock prices. It can also inflate other measures of company performance by lowering the amount of capital employed.

Here are some recent examples.

At the beginning of 2022, AkzoNobel announced a “repurchase programme” aiming to buy back up to €500 million of its shares. A couple of weeks later, Covestro — a spin-off company from Bayer — said it would do the same over two years. And the same day as Covestro, Linde, a leading producer of industrial gases, announced a two-year share buyback programme of $10 billion.

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Don’t believe everything you hear — EU chemical industry is doing fine

BASF also has a programme to buy back up to three billion euros worth of its shares within two years.

The week after Russia invaded Ukraine — an event that skyrocketed gas prices and raised the costs for the chemical sector — the German company spent €200 million buying back its own shares.

Now, this is not a ChemSec attempt to portray the chemical industry as particularly villainous, as buying back stocks is common practice in many industries. Tech, energy, construction ­– they all do it – and it’s not generally frowned at. It’s standard practice in today’s economic system.

There are, however, critics. US economics professor William Lazonick calls it a way to extract value rather than create it and uses Exxon Mobil as an example:

“Exxon Mobil, while receiving about $600 million a year in US government subsidies for oil exploration, spends about $21 billion a year on buybacks. It spends virtually no money on alternative energy research”, he writes in the Harvard Business Review.

“Companies should be able to manufacture sustainable products without using tax money”

And here’s where similarities to the chemical industry can be found.

Because even though these companies obviously have a lot of money to spend on their businesses, the idea that public funding should pay for research and development of safer chemicals seems almost preordained for the involved parties.

People may call us naïve and say that “this is just how economics work”. But, suppose you ask a typical everyday EU citizen what he or she thinks.

In that case, we are sure most would agree that companies should be able to manufacture sustainable products without using tax money and that they shouldn’t spend profits on elaborate financial games.