INSIGHT: BASF sees sustainable opportunities in industry

30 November 2011 16:52  [Source: ICIS news]

By Nigel Davis

BASFLONDON (ICIS)--BASF’s current strategy will see it move closer not to the consumer but to the sort of intermediaries that are making things happen across industries in the developing and developed world.

Sustainability lies at the heart of a lot of what the Germany-headquartered chemicals giant wants to achieve. The greatest challenge will be to turn sustainability concepts into successful business reality for this maker of a wide range of basic chemical intermediates.

BASF sees this as a move away from what it calls classical chemicals towards functional materials and solutions.

Recent acquisitions have seen it strengthen the customised products part of its portfolio, where market strengths can be built in downstream chemical value chains. It bought Ciba Speciality Chemicals and Cognis in order to gain deeper access to some of these more specialised, consumer-oriented businesses.

The company says now that it wants to enter selectively “materials and solutions businesses where chemical competence is [a] growth driver”.

A great deal of scenario work and market analysis has pointed BASF in the direction of fast-growing industries in emerging market economies, as well as newer industrial sub-sectors in the developed world.

Recent examples of the push into areas of this type are the development of lithium-ion batteries for vehicles and the acquisition of the ultra-filtration company inge watertechnologies.

Successfully developing some of these sustainability-driven emerging-technology businesses – linked in these cases to mobility and the availability of clean water – will be key to driving growth.

And the company’s growth plans are ambitious.

There was clearly some concern at BASF headquarters in Ludwigshafen, Germany, on Tuesday as to the timing of the release of details of the company’s latest strategic goals (which are expected to culminate in sales growth of 6% per year between 2010 and 2020 and a doubling of earnings before interest, tax, depreciation and amortisation (EBITDA)).

The eurozone crisis casts a great shadow over business currently. And there are deeply worrying questions of growth in the US and, most importantly as far as chemicals are concerned, the path of economic growth in China.

BASF believes it can capture stronger growth in the emerging markets for chemicals if it applies its "Verbund" concept carefully.

"No other chemical company has such a broad technology base and such extensive global access to customer industries," it says.

“We will explore and open up new growth markets by integrating more closely our R&D [research and development] expertise, market knowledge and customer relationships.”

The production Verbund should allow it to make certain chemicals more cost-effectively than others. The technology Verbund gives it the chance of making connections that potentially can drive new businesses.

“Having a deep understanding of our customers’ value chains will be even more important for us in the future,” BASF says.

In some areas it works closely with customers and has what it calls “excellent access” to them. But it wants to use this access more intensively so it can apply its competencies in a more focused way.

So the next 10 years for BASF will be very much about focus down a variety of chemical and customer value chains.

Its competencies in chemicals have stood it in good stead over many years and helped produce particularly strong sales and earnings in 2010, just a short while after the 2008–2009 downturn.

At the beginning of what is likely to be another very difficult period for industry and the global economy in general, it is likely to prove difficult to grow or match targets in the way it might like.

But who knows what the period around and post-2015 might bring?

BASF is the major global chemicals producer but also has a sizeable oil and gas business, which plays an important role in the portfolio, stresses new CEO Kurt Bock.

The oil and gas operations generated 17% of group sales in 2010 and contributed around 28% to earnings before interest and tax (EBIT) before one-off charges and gains, and 20% of net profits. They provide a steady cash flow and also a financial hedge against volatile prices for hydrocarbon feedstocks.

Now there are signs that more can be made of the technological synergies that exist between oil, gas and chemicals. Enhanced oil recovery (EOR) using a proprietary biopolymer called Schizophyllan could develop into a big business for BASF, Bock believes.

Schizophyllan is being produced by BASF from a fungus, currently on a pilot scale, but EOR trials are scheduled to help confirm laboratory results.

The fact that BASF will be able to apply its technologies through multiple market chains in very different geographies puts the 2020 sales and earnings goals into perspective.

The company pinpoints sustainability and innovation as key drivers of growth across its businesses over the coming years.

The clever application of chemistry – alongside a few other disciplines, of course – will help it capture that growth.

By: Nigel Davis
+44 20 8652 3214

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