INSIGHT: BASF cuts Ciba deep in uncertain times

07 July 2009 17:15  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--BASF’s cuts at Ciba will be brutal. The chemicals giant expects to lay off the equivalent of 28% of the former Ciba Speciality Chemical workforce. Some 3,700 job losses will include some BASF jobs but the brunt will be borne by Ciba workers.

A harsher statistic is the expected closure or sale of 23 of 55 Ciba production sites and the consolidation of 36 of 70 sales and administration offices. The remaining production locations will be “optimised or restructured”.

BASF is absorbing the former Ciba businesses at a bad time. Its own production capacity is cut by close to 25%: it has been since late last year. BASF CEO Jurgen Hambrecht said last week that he saw few signs of the much-vaunted upturn. Back in February, he had warned of a tough restructuring process.

The Ciba restructuring is designed to save €400m/year ($550m/year) from 2012. The cash costs alone will be €550m.

Demand for chemicals has dropped with manufacturing output and reduced industrial and consumer activity. It will not pick up until there is a great deal more confidence in the market place.

The recession has exposed the chemical industry, particularly in markets related to automobiles and construction.

Hambrecht spoke of the “dramatic” impact on chemicals in an interview with the German newspaper Sueddeutsche Zeitung. Some segments had seen sales plunge by 30-40%, he said.

BASF has moved smartly into products designed for the two hardest hit sectors over the past few years to supplement those business lines it already has. It agreed the purchase of catalyst maker Engelhard and the construction chemicals business of Degussa in 2006.

The Ciba acquisition, made late in the day as far as pre-crisis merger M&A (merger and acquisition) activity is concerned, gives the broadest based chemicals maker a stronger position in plastics and coatings as well as a water treatment business.

Ciba Speciality Chemicals was a Swfr6.5bn (€4.3bn/$6.0bn) turnover company that employed 13,300. The acquisition is reckoned to have cost BASF $5.1bn.

The former Ciba production locations are concentrated in Switzerland and elsewhere in Europe but the company made chemicals in North America and Asia.

BASF is committed to the old headquarters location in Basel, Switzerland and has based its new paper chemicals business there alongside the coatings and starch operations, plastics additives and technology, research and restructuring units.

Ciba employed 1,400 in Basel and a quarter of those jobs will go. These, and the other cutbacks, are in addition to 2,000 job losses Ciba announced some time ago as part of a restructuring programme.

The cuts made by BASF will fall heavily on duplicated positions and functions but it is clear that in the current environment everything is under review or consideration.

In Switzerland, 500 of 2,500 jobs will go. Four big production sites in Switzerland are affected and there will be major cutbacks at two big former Ciba sites in Germany.

It is BASF’s announcement of the planned closure or sale of 23 production locations from 55, however, that strikes home. Many speciality chemicals are made in batch processes in relatively small reaction vessels. Consolidation of this sort of activity should be relatively easy and facilitate site closure or divestment.

It is the expertise rather than the assets that BASF will want to keep in house.

As the integration process began earlier this year, Hambrecht was clear on what BASF wanted from at least one part of its most recent major acquisition. The sentiment, however, can be read across other parts of the business.

"In paper chemicals, we will intensify the urgently needed restructuring process and become one of the leading suppliers with an extensive portfolio,” he said. “By sustainably strengthening the combined businesses, we will provide a long-term perspective for profitable growth.”

The announced closures and redundancies, however, also highlight a current dilemma in chemicals.

Companies are having to downsize and adjust portfolios to cope with a new demand environment. There is little clarity here, just the assumption that demand growth may not return quickly to pre-recession levels.

And it is the view of some that the pillars upholding chemicals demand are under threat.

International eChem chairman, Paul Hodges, touched on this in his Chemicals & the Economy blog for ICIS this week.

He discussed the Bank for International Settlements (BIS), the central bankers' bank, annual report and suggestions in it that investors, consumers and policymakers have been "fooled into thinking that that trend growth was higher than it really was."

"A financial crisis bears striking similarities to medical illness,” the bank said.

“In both cases, finding a cure requires identifying and then treating the causes of the disease."

The chemical industry may be struggling now but it will be struggling for a lot longer as it faces an extended period of uncertain demand from the key sectors of housing construction and automobiles.

These sectors, alongside others, less hard hit but hit nevertheless, will take time to recover.

“If the BIS are right, then considerable downsizing awaits the industry over the next few years, as it adjusts to the new realities,” Hodges said.

As it integrates Ciba, BASF has to make attempts at least to develop the flexibility that a much more uncertain future for chemicals demands.

($1 = €0.71, Swfr1 = €0.66/$0.92)

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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