BASF will benefit from momentum and higher prices

12 August 2002 17:06  [Source: ICIS news]

BASF’s size, diversity and the degree of integration within the Verbund have bolstered the company significantly through the current downturn. Management reacted sharply in mid-2001 to dire warnings of economic gloom ahead having been over-confident at the start of the year. In hindsight that was a good move. In the first half of this year, BASF has proved that it has been able to take advantage of only a modest return to growth. In the circumstances, the company has some justification in being cautiously optimistic about the remainder of 2002.

Chairman and chief executive Jurgen Strube has echoed warnings from others about stock market turbulence, consumer confidence and global security and its effects on oil prices. But he has been able to demonstrate that an active approach to sustainability pays off. Both words (active and sustainability) are important. "We create value for our customers and for our company by adapting our structures and processes to make them more flexible and closer to the market," he said last week at the half year press conference. BASF continues to look at what in the portfolio is sustainable and what is not; the strategy is one of ‘adding value through growth and innovation’. A great deal is being done to cut costs permanently. Strube says that these efforts are proving to be successful.

In 2001 BASF cut costs by Euro250m ($246m). It has a Euro1bn end-2003 cost reduction target. Further inroads on costs have been made this year, the structural reforms leading to plant closures over and above those announced in 2001.

Tight cost control has clearly been of benefit in 2002. A moderate upturn from March this year prompted good volume demand in the second quarter, BASF says. Second quarter sales of Euro8.4bn were up slightly as a result compared with the similar period of 2001.

The reported rise in second quarter earnings before interest and tax (EBIT) of almost 10% was better than expected. The rise is down to self-help, and BASF says now that it aims to achieve higher EBIT (before any special losses or gains) than in 2001 on roughly the same level of sales.

The fact that BASF is integrated upstream clearly was of benefit in the second quarter, with the company able to make the most of higher petrochemicals demand and rising prices. New petrochemicals capacity also helped push sales volumes up. Earnings from the chemicals segment, in which petrochemicals sits, were up by a third. Earnings from the company’s plastics and fibres segment were also up thanks to higher prices, brought about by product shortages and higher capacity utilisation. A significant (65%) increase in earnings from businesses in the performance products segment was driven by a mixture of restructuring and cost reduction backed by price increases.

BASF is clearly under pressure from the relatively poor showing of its agricultural products businesses in North America and says that sales won’t this year match those made in 2002 but it does expect higher EBIT from the segment. Regionally, the company registered an upward trend to business in Europe, the North American Free Trade Area (Nafta) and Asia in the second quarter but a steep decline in sales in South America.

The company appears to be doing a lot of things right but costs still have to keep coming out of the business and BASF has to maintain a watchful eye over the viability of the portfolio. BASF may have cut back on capital spending for the time being but earlier commitments, made at the right time, are producing results. The Port Arthur, Texas, cracker expansion is a case in point, as are the superabsorbents project in Antwerp, Belgium, and the propylene oxide/styrene monomer (PO/SM) Ellba Eastern joint venture project in Singapore with Shell.

BASF of course wants to see the US business turn around and that may well be in sight. Beyond that, it is in a good position to take advantage of fast-growing business in Asia. The Elba Eastern project gives BASF increasingly important access to its own styrene in the region and helps open up further polyurethane (PU) opportunities. For the future, BASF has to build further on its recently inaugurated Kuantan site in Malaysia and the Nanjing project in China. Both sites represent clear opportunities for the company to develop its concept of Verbund (or integration) and make the most of high rates of growth for chemicals in the region.

By: Nigel Davis
+44 20 8652 3214

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