INSIGHT: BASF can grow in 2012 but maybe not in chemicals

24 February 2012 17:09  [Source: ICIS news]

By Nigel Davis

BASF headquarters in LudwigshafenLONDON (ICIS)--The 14% dividend increase proposed by BASF reflects confidence in the second half of 2012 as much as the chemical giant’s ability in 2011 to generate cash even in difficult economic times.

Alongside most firms in manufacturing, BASF is finding the going tough.

In the fourth quarter of last year its sales pushed higher but earnings were hit by lower margins and reduced demand, particularly in chemicals. Operating profits (EBIT – earnings before interest and tax before special items) were down 14%.

The company says that the trend first seen at the start of the second half in 2011 continued into the fourth quarter. “Customers were more cautious in their ordering, reduced their inventories and put off orders in expectation that the economy would decline and prices could possibly soften.”

While it generates something like 56% of its sales in Europe, BASF cannot expect much growth in the domestic European markets this year – unless it can really make more from less. It acknowledges that it will have to push harder in the emerging economies and with the sort of closer customer relationships that might help it generate more sales from existing activities.

On Thursday, the European Commission (EC) put the eurozone crisis into perspective when it forecast no economic growth in the EU in 2012 and a drop in activity of 0.3% in the eurozone. Its comments characterise the first half 2012 outlook. “Negative feedback loops between weak sovereign debtors, fragile financial markets and a slowing real economy do not yet appear to have been broken,” it said.

Not much is expected from the US either in 2012 with GDP growth forecasts around 2%. So it will be business in China and the emerging economies in Asia, Latin America and elsewhere that will have to provide a substantial part of BASF's growth for most of the year.

BASF’s planning assumptions are always worthy of note.

Its outlook for 2012 is based on global GDP growth being flat compared with 2011 at 2.7% but “solid” growth in chemicals production (excluding pharmaceuticals) of 4.1%.

BASF expects an average exchange rate of $1.30 per euro and a high average Brent oil price of $110/bbl.

At this time last year the company was looking to global GDP growth of 3.3%, chemicals growth of 5.2%, a Brent oil price of $90/bbl and an average exchange rate of $1.35 per euro.

The first half of 2012, in particular, will be difficult for chemicals with volumes constrained and high oil-based raw material costs still squeezing margins.

BASF expects the global economy to pick up in 2012 but the year-on-year earnings and returns comparisons to be negative in the first half and positive in the second.

“In the first half of 2012, we will likely not achieve the high levels of the first two quarters of the previous year,” management board chairman Kurt Bock said on Friday. “For the second half, we expect to surpass the levels of the same period of the previous year.”

BASF also expects earnings to increase in 2012 in all its business segments apart from chemicals and the ‘other’ segment which last year included styrenics – which merged into the new player Styrolution – and its fertilizer operations.

“Due to divestments and strong pressure on margins, earnings in the chemicals segment are unlikely to match the record level of 2011,” Bock said.

BASF’s chemicals businesses include inorganics, petrochemicals and intermediates while its plastics segment businesses are in performance polymers and polyurethanes.

The fourth-quarter results show chemicals EBIT before special items down 29%, with plastics profits down 61% year on year and 65% lower than in the 2011 third quarter.

Regaining volumes and momentum in some of the core chemicals businesses and passing on higher raw material costs in some plastics intermediates such as TDI (toluene diisocyanate) may not be easy in 2012 but possible as the year progresses.

BASF is seeking approval from its annual meeting for a dividend payout of $2.50, up from €2.20 for 2010.

($1 = €0.75)

Read Paul Hodges' Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214



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