Market intelligence: BASF feels optimistic for 2011

16 May 2011 00:00  [Source: ICB]

BASF made a lot of money in the first quarter
Rex Features

After a powerful performance in the first quarter, the German major is looking forward to healthy growth in 2011, driven by good pricing power and margins

so, BASF does not feel inclined to splash out on a new cracker to capitalize on shale gas feedstock dynamics - but it is pushing ahead with capital investments in China, Malaysia and Brazil.

The German 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.

High chemicals demand is ongoing, he added. The group's chemicals and plastics divisions produced record earnings in the first quarter of 2011. Demand for engineering plastics has 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 skeptical 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 highpoint 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. 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."

BLAST INTO ASIA
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 in 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 added.

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.

FIRST QUARTER ROCKETS AHEAD
BASF's first quarter net income more than doubled to €2.41bn from €1.03bn in the same period a year earlier, because of strong sales and increased capacity utilization.

Sales in the first quarter rose by 25% to €19.4bn, while earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 28% to €3.37bn.

BASF said it achieved double-digit earnings growth in all regions. In Europe, sales were 24% higher than the first quarter of 2010, with demand for chemical ­products remaining high.

In North America sales rose by 21% in US dollars and 22% in terms of the euro. In the Asia-Pacific region, sales were 28% higher in local currency terms and 33% higher in euro terms, with an increase in chemicals sales volumes.

"The Cognis businesses acquired in December 2010 made a significant contribution to this substantial sales growth," said former CEO Hambrecht.

BASF said capacity utilisation rates at its plants were good and demand in its chemicals business - chemicals, plastics, performance products and functional solutions - increased, compared with the first quarter of 2010.

"Despite strong increases in raw materials costs, income from operations before special items rose by 40% to €2.7bn," Hambrecht added.

By: Nigel Davis
+44 20 8652 3214

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