INSIGHT: BASF confident in a lower growth world

22 February 2008 16:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--BASF is cautious and quietly confident in its outlook but faces some harsh realities. The global credit crisis has by no means been played out. Indeed, it is acquiring nightmarish proportions.

The sharp downturn in housing construction and in the automobile business in North America hits to the heart for all players feeding into those markets.

The US chemicals market will, probably at best, not grow at all this year. Feedstock costs globally remain achingly high.

Chemicals producers were fortunate in 2007. With supply/demand balances tight and demand growth strong they were able to lift sales and push prices higher.

One might have expected the chemicals giant to reflect the impact of slower demand combined with higher raw material costs in its fourth quarter.

Yet the negative effects in the financial results published on Thursday were difficult to find.

“The fourth quarter for BASF was a great quarter… we have no reason to hide,” said executive board chairman Jurgen Hambrecht said.

Cracker margins are not as good as they used to be. Business has slowed in North America and the company expects, in Hambrecht’s words, “a more modest growth scenario”.

Yet the BASF CEO said the company’s order books are “at the very high end”.

“The first few weeks of 2008 have run on smoothly from the past year,” he added.

But BASF has lowered its chemicals growth forecasts for 2008 - to 2.8% globally.

Its planners currently are working on global GDP growth dropping to 2.8% in 2008 from 3.5% in 2007 with North American GDP growth slowing from 2.2% to 1.6%.

China’s rapid growth will slow to 9.7% from 11.4%, it says.

BASF will not be immune to the slowdown, although its portfolio has been shifted away from cyclicality and the breadth of the product base offers some protection from the worst ravages of a downturn.

But does the portfolio also mean that BASF is not yet picking up on the weak spots that ultimately will drive the chemicals markets down?

The chemicals business will not gain its premium of growth over GDP this year. The important US market will be extremely difficult. There are no specific plans to tackle US efficiencies but BASF a global programme is intended to save €300m.

North America sales last year - by customer location - matched those of Germany but Asia-Pacific sales (at €8.1bn, up 18%) were catching up fast. By location of production, Asia-Pacific sales were €8.8bn.

Asia-Pacific operating profits (EBIT – earnings before interest and tax) were three and a half times higher in 2007 at €828m. BASF’s North America operating profits were down 12.3% for the year at €762m.

Of greater importance is the fact that North America profits were off 64% in the fourth quarter at €68m.

Just how contagious America’s difficulties are - or rather, their impact on the global economy - remain to be seen. A difficult year beckons and one in which BASF will be sorely tested to match its goals for growth.

The portfolio looks robust but the markets may yet be shaky. Stronger evidence of the latter could emerge at any time.

By: Nigel Davis
+44 20 8652 3214

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