INSIGHT: BASF can be buoyed by volume growth

16 July 2007 17:24  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--As much as 69% of BASF’s portfolio is vulnerable to a chemicals sector cyclical downturn, or a slowdown in industrial production growth, say analysts at UBS.

The giant chemicals maker may not have that many plastics or at first glance cyclically-vulnerable commodity products in its portfolio, but when a downturn hits it will have a battle on its hands like other players in the sector.

Nevertheless, the bank has raised significantly its economic and industrial production growth projections for 2007 and 2008.

Its earnings per share (EPS) valuations for the chemicals giant are up significantly as a consequence, particularly for 2008.

A great deal has been done to buffer BASF against cyclicality. And indeed the company’s exposure is significantly less than it was in the late 1990s when about 60% of sales were in commodities.

But as UBS notes: “The investors’ argument that ‘BASF is no longer cyclical’ is incorrect. A great deal has changed [see Insight 29 June] but based on the company’s own estimates about 39% of sales are still made in commodities. 

UBS calculates that a further 30% of sales are linked to gross domestic product (GDP) and industrial production (IP) growth.

Shifting ethylene supply/demand balances from 2008/2009 will have an impact on BASF even though the company is not exposed in polyolefins or the merchant ethylene/ethylene oxide market to a great extent.  

The company’s olefins expansion in Antwerp, Belgium, is due on stream in 2007 and petrochemicals are the cornerstone of its much vaunted verbund integration concept.

In other key products, the bank is forecasting a supply-driven downturn in MDI (methyl di-p-phenylene diisocyanate) and TDI (toluene diisocyanate) in 2008.

BASF still faces an uneasy future in styrenics although segment-wide consolidation would support better profitability.

Yet its commodity businesses – and many other products besides – are currently buoyed by strong volume demand. Better than expected volumes have benefited polyurethanes this year.

A delay in bringing on stream BASF’s own Caojin, China, MDI plant has underpinned improved supply/demand balances and sustained capacity utilisation in 2007 versus 2006.

The shift in the BASF portfolio away from commodities and towards products and services with inherently less volatile earning streams has been significant even in the past two years.

BASF says that chemicals and basic materials account for 39% of the portfolio in 2007 compared with 43% in 2005.

Products tailor-made for customers – BASF’s ‘customised solutions’ – comprise 35% of the portfolio compared with 28% two years ago.

The company’s ‘formulated materials’ account for the remainder.

Earnings from the first group of products are driven by supply/demand balances, UBS says. Formulated materials, which lie somewhere between specialties and commodities, are driven by volumes.

Economic and industrial production growth are also key drivers for customised solutions which can be hurt when markets turn down.

BASF’s power to innovate should not be discounted as a driver of profits and the top line. Its oil and gas segment acts as an important hedge against the impact of high petrochemical feedstock and energy prices.

UBS also underlines the importance of the innovative plant science deal with Monsanto, which it sees as adding to its share price projections.

It has adjusted upwards its share price target for BASF – to €105 ($145) from €92 – and significantly upgraded its EPS estimates for the group for the next two years – by 10% for 2007 and 25% for 2008.

The bank’s economists have lifted their GDP forecast from 2007 and 2008 to 4.4% from 3.5%. IP forecasts are up to 5.8% in both years from 4.6% for 2007 and 5.0% for 2008.

BASF’s shares traded just above €100 in Europe on Monday.

($1 = €0.73)

By: Nigel Davis
+44 20 8652 3214

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