INSIGHT: BASF is contracting and will shrink further still

27 February 2009 17:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--BASF cannot see anything even approaching the first stirrings of an upturn.

The company expects to shrink in 2009 as its global operations remain under pressure. “A turnaround, or growth, is something I can’t see yet,” CEO Jurgen Hambrecht said on Thursday. “Crop protection is the only sector that will grow this year.”

That the outlook for the most broadly-based of chemicals players is bleak is an understatement. Almost everywhere you look demand is down or shrinking. The start of 2009 has not been better, but worse, than December 2008.

The December slump was unprecedented and prompted the idling or closure of as much as 25% of BASF’s operating capacity.

Nothing has changed much in that regard so far in 2009.

Plants are still down and as many as 3,000 employees are on short-time working. BASF is having to close some plants it might otherwise have replaced with new capacity to make coatings and intermediates.

The company is hurting the most in businesses that sell into automotive – coatings and performance plastics; electronics; construction; and other hard hit industrial and commercial sectors of the global economy. And the word global is important here.

BASF lost heavily on its operations in North America and in Asia Pacific in the fourth quarter of 2008. Europe held up reasonably well – regional profits were only down 19% – but as this year progresses can be expected to begin really to feel the pinch.

The German and wider European economy is shrinking badly and BASF will shrink with it. The CEO expects sales to fall in 2009 – they reached €62.3bn ($79.9bn) in 2009 although 23% of that amount was generated by oil and gas.

“Strong businesses [for BASF] such as crop protection, nutrition, cosmetics, hygiene, as well as oil and gas act as stabilising factors,” Hambrecht said at a press conference. It is the other parts (the majority) of the portfolio that are feeling the strain.

And a strain it is. Hambrecht makes no bones about the fact that times are hard and that BASF employees have to pull together. The company has talked about some 1,500 job cuts coming this year as a group-wide restructuring plan and plant closures take effect.

What is not yet known is how the absorption of the Ciba Specialty Chemical businesses will affect things. BASF agreed to buy Ciba at the peak of the cycle so is paying dear for some further downstream integration. It will reorganise some of its own divisions and create a new paper chemicals business when the Ciba deal finally goes through.

As that happens it will have a better idea of what synergies it might achieve and how it can save money through integration. The need to do so will be even more pressing given that the industries Ciba serves are among those hardest hit by global recession and the credit crunch. “The extent and impact of the economic crisis will require tough decisions from all of us,” Hambrecht said.

The focus across BASF has to be, as it does at other companies, on cash. The company is a big cash generating machine: free cash flow was as high as €2.5bn but down from €3.2bn in 2007.

Earnings will decline, possibly significantly this year, as the European operations are hit harder by the downturn. The company calls its goal to earn the cost of capital and keep the dividend stable “ambitious.”

An important point is that BASF is not vulnerable, as other chemical companies are now, in terms of debt. The company learned the lesson to not over-reach itself many years, indeed decades ago.

And it is unlikely to be anything other than cautious now.

“We will not make a major acquisition,” Hambrecht said on Thursday, a comment which comes as no surprise. “We really have to face up to reality,” he added, although he suggested that minor acquisitions that focus particular businesses are possible.

There is little or no visibility in the chemicals business now but the industry’s position is not unique. What can be seen, however, is not good: much lower automobile sales; truck sales in some parts all but come to a halt; and greatly depressed consumer spending.

BASF may be a giant of a company, and particularly diverse, but most of its businesses serve parts of the economy that are being hard hit by global recession. In the circumstances, and according to the chemicals giant, businesses such as crop protection, nutrition, cosmetics, hygiene, and oil and gas, are the stabilising factors.

($1= €0.78)

For more on this week's financial results and other news listen to the ICIS Chemical News Central podcast
For more on BASF visit ICIS company intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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