INSIGHT: BASF growth prospects look strong

03 August 2007 17:25  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--BASF appeared buoyant this week when reporting another strong quarter of growth in sales and profits.

The company may not have made as much money on its oil business compared with last year as the weaker dollar hit euro earnings, but its chemicals side boomed.

Petrochemicals profits were up, with styrenics doing better in a tighter market. Even fine chemicals, a difficult business for some time, showed some welcome improvement.

But where does the oil and gas to chemicals giant see its businesses going in the second half?

Last year, operating profits hit €7.26bn ($9.95bn) on sales of €52.61bn. BASF’s operating profits in the first half were up 9.8% at €4.15bn on sales 17.9% higher at €29.29bn.

On the face of it management may not appear too upbeat. Full-year 2007 profits are expected to at least match those of 2006, they say.

Given the first half’s growth, that would imply at worst a weaker second half and it begs the question whether the company is looking at the world through a glass half full or half empty?

CEO Jurgen Hambrecht says there are no signs of a summer slowdown. Demand remains high and the economic environment in which the company operates is being driven particularly by strong growth in Asia in general and China in particular.

BASF saw double-digit sales growth in all regions in the second quarter, with the strongest growth in South America, Africa, the Middle East and Asia. The US has proved difficult but its economy has remained strong and continues to grow.

BASF says it can grow faster than the chemicals market in 2007.

“In our outlook for 2007, we confirm our optimistic expectations,” Hambrecht says.

The downside as far as profits are concerned is the fact that scheduled plant turnarounds in petrochemicals particularly are likely to reduce earnings by €150m in the second half. The crackers at Port Arthur, Texas, and Antwerp in Belgium come down starting in the third quarter.

BASF adds that it will increase research and development spending further.

To get an idea of how strongly the company is performing, it is worth noting that cash generated from operations in the first half was 24% higher at €2.7bn. BASF is not so much riding on the crest of a wave or bumping along an earnings plateau but reaping the benefits of astute investment in stronger growth business: catalysts and construction, for example, and its focus on R&D.

The underlying assumptions for the second half are that 2007 global economic growth will be a very healthy 3.5% (up from 3.2%) and that oil prices will be on average higher: with Brent crude at about $65/bbl compared with an earlier projection of $65/bbl.

The average dollar/euro exchange rate is expected to be 1.35 against 1.30.

($1 = €0.73)

By: Nigel Davis
+44 20 8652 3214

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