In tough times BASF makes most of the Verbund

18 March 2003 14:28  [Source: ICIS news]

BASF’s diversity and the resilience of its highly integrated structure, the so-called Verbund, set it apart from much of the rest of the chemical industry in 2002 and has continued to do so in the first two months of 2003.

The company is hardly over-optimistic in its outlook for the current year but knows that it can build on recent product volume additions and the continued search for lower costs.

Chief executive, Jurgen Strube, will step down in April having demonstrated that it is possible to stay the course in chemicals. "We see change as an opportunity," he said on Tuesday at the annual results press conference, when talking about what he still expects to be a difficult few months. The point is that his words are by no means simply hollow rhetoric. The company can be expected to adapt and, even if not thrive, survive quite healthily in these challenging times.

BASF has hedged effectively against higher naphtha costs in the first quarter, its principal raw material, and has been aggressive in product pricing so it is holding on to margins. The situation will be different in the second quarter it admitted today so the critical period in 2003 is yet to come when the focus has to shift even more towards the customer and the company’s ability to pass on higher costs.

BASF says it got off to a good start in 2003. Year-to-date sales are up on the admittedly weak first two months of 2002 but Strube said that that should not be taken as an indication of things to come. Earnings before interest and taxes (EBIT) before special items are expected to be significantly higher in the first quarter compared to last time. Second quarter sales are forecast to be on a par with the second quarter 2002 outturn and the incremental increase in earnings is expected to be lower.

BASF has been lifted by a stronger performance in the US; indeed a turnaround for 2002 as a whole compared with the losses made the year before, and stronger sales and profits in Asia. Sales in the Asia, Pacific Area, Africa region rose by 8% over the course of the year to reach Euros5.1bn with the boost coming primarily in chemicals and plastics. Regional EBIT of Euro203m (including special items) compared with the reported regional loss in 2002 of Euro28m.

In 2002, the company ran headlong into the third quarter slowdown but the fourth quarter result showed an improvement and after exceptional items a return to profit compared with the reported fourth quarter 2001 EBIT loss.

BASF said throughout 2002 that the goal was to generate significantly higher earnings on roughly the same level of sales from on-gong businesses. And excluding the extraordinary gain of Euro6.1bn booked at the end of 2001 from the sales of the pharmaceuticals business, the company did just that. Sales in 2002 were 0.9% lower at Euro32.2bn and income from operations before special items 25.6% higher at Euro2.9bn. EBIT was up 117.0% at Euro2.6bn.

BASF cut back hard in 2002 pushing on with the restructuring plan begun the year before. Capital spending was cut back by 18% to Euro3.3bn for the year (2002) and research and development spending trimmed by 9.0% to Euro1.1bn. Operating cash flow was held at Euro2.3bn.

The company will be hard pressed this year to maintain performance but is likely to do so given continued growth in Asia and an expected slow economic recovery in the US. The current outlook is, of course, clouded by uncertainty surrounding further development of the Iraq conflict.

Strube today outlined two possible scenarios. In the first, a fast, peaceful solution to the conflict could lead to a 2003 average oil price of $23 a barrel, global economic growth of over 2% and a substantial increase in global chemicals production of more than 3%, he said.

In the second, a limited war in terms of duration and territory would still mean the stagnation of global growth in the first half. BASF believes that under this scenario oil prices would spike briefly over $35 a barrel and global economic growth would be nearly 1% weaker than in the first case. Global chemical production would be expected to grow at only about 2%.

Unfortunately the second scenario today looks like the possible background for chemicals in 2003. And, if the conflict remains unresolved, stagnation is to be expected.

By: Nigel Davis
+44 20 8652 3214

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