INSIGHT: BASF optimistic for 2011 after hitting first-quarter high

06 May 2011 15:33  [Source: ICIS news]

By Nigel Davis

BASF headquarters in LudwigshafenLONDON (ICIS)--So BASF does not feel inclined to splash out on a new cracker to capitalise on shale gas feedstock dynamics but it is pushing ahead with capital investments in China, Malaysia and Brazil.

The chemicals giant is buoyed by a particularly strong first quarter, in which demand for chemicals and plastics continued to grow. Prices were pushed higher and so were margins as markets tightened, particularly for products such as caprolactam (capro), acrylics, butanediol and ammonia. Even styrenics benefited from strong demand and higher prices, new CFO Hans-Ulrich Engel said on Friday.

High chemicals demand was ongoing, he added. BASF’s chemicals and plastics divisions produced record earnings in first quarter 2011. Demand for engineering plastics improved, driven by the automotive sector.

Demand from autos and construction for polyurethanes (PUs) was higher but the company admitted raw material costs cannot be passed on in prices. Demand for BASF’s construction chemicals rose slightly, driven by emerging market growth, but North America remains challenging and operating profit for the three-month reporting period did not match last year’s level.

BASF remains optimistic about 2011, new CEO Kurt Bock said. The company has seen strong business continuing into the second quarter so far and its order patterns are strong.

“What we see today gives us no reason to be more sceptical than we were at the end of February,” Bock said.

“What we have now on our books gives us some visibility for the next two months,” he added. 

From the macro-economics, the company does not see any reason the situation will change.

Clearly, BASF will feel the impact of curtailed oil production in Libya. It is yet to see negative effects from the devastating earthquake and tsunami in Japan.

It runs a finely-tuned, extensively-integrated production, marketing and sales enterprise that can see it effectively through difficult times. It has proved to be particularly efficient at producing results when the business environment improves.

Whether or not the current quarter marks the high point of the cycle, particularly given the downward sentiment on commodities of the past few days, remains to be seen. However, BASF has not had a sniff of the downturn yet.

Outgoing CEO Jurgen Hambrecht was upbeat on Friday. BASF has emerged stronger from the crisis, he told shareholders at the annual general meeting (AGM).

BASF is paying a 30% higher dividend to shareholders for 2010 – last year its share price climbed by 37%.

Hambrecht admitted the strong economic momentum in 2010 came as a surprise. However, he said the upturn has clearly continued and even if Libya and the Japan disaster have a negative impact during the course of this year, the company’s aim is to “significantly exceed the 2010 record levels in sales and earnings”.

It is BASF’s focus on emerging markets – it wants to generate sales of more than €20bn ($29bn) in Asia by 2020 and develop a more significant production presence in Brazil – that is likely to stand it in good stead. However, the company’s dedication to innovation and its significant oil and gas business are hugely important to stability and growth.

The dividend this year will be a significant €2bn. BASF is working hard to integrate the Cognis personal care chemicals acquisition and wants to spend more on research and capital projects, so sizeable acquisitions are probably out of the question.

The company is riding high but also mindful of what has had to be done to get this far – a €50m bonus is being paid to employees worldwide in recognition of their efforts through the crisis.

“In 2011, we may be presented with opportunities arising from stronger growth in the global economy and our customer industries,” the company says in its earnings statement. “Furthermore, decreasing raw materials costs, ongoing product shortages – especially in the chemicals and plastics segments – as well as an appreciation of the US dollar would have additional positive effects on our margins.”

“However, there are also risks to the further development of our business. The effects of the earthquake off the coast of Japan could slow global growth during 2011. The potential consequences of supply bottlenecks, such as for electronic components from Japan, could include production outages in some of our customer industries – in particular in the automotive and electrical industries as well as in the information and communications industry,” it adds.

Because of the situation in Libya, the company does not expect to be able to resume crude production there in 2011. As a result, it is planning a higher average oil price of about $100/bbl, up from $90/bbl previously.

($1 = €0.69)

For more on BASF, visit ICIS company intelligence

By: Nigel Davis
+44 20 8652 3214

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