INSIGHT: BASF banks on stronger chemicals growth in Asia

27 February 2013 17:25  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--BASF is basing its 2013 outlook on global chemicals production growth of 3.6% and global economic growth of 2.4%.

The chemicals growth number came as a surprise for some, particularly following only sluggish chemicals output growth in 2012 of 2.6%, and a lower multiple to GDP which grew at just 2.4%.

Generally, weak economic conditions persist and the chemical giant’s apparent optimism - or should that be belief that things must get better? - is difficult to square with the dire state of Europe’s major economies, combined with only lacklustre economic growth in the US and on-going weakness in China.

BASF had a relatively good year in 2012 but was buoyed by a sharp rise in profitability from its oil and gas businesses. Chemicals operating profits were down 30% year on year as were profits from plastics. Agriculture profits were up 27% and oil & gas profits up 85%.

CEO Kurt Bock said on Tuesday that the company did feel that investor uncertainty would lift in 2013 – although the results of the Italian election had dealt the markets a blow.

“Worldwide economic growth will be bolstered... by low interest rates and government stimulus measures in emerging markets,” he said. “We expect a gradual decline in economic uncertainty and an increase in investor and consumer confidence.”

BASF felt the benefit of re-stocking in January and it clearly does remain to be seen just how far returning consumer confidence will go this year towards bolstering corporate profits. The news from Europe is not good, with the European Commission on 22 February predicting that eurozone GDP would contract in 2013 and EU GDP barely grow.

A return to growth in the US does appear to be gaining pace, however, although economists have warned of the overhang of the fiscal cliff negotiations which could stifle growth later in the year.

Chemical industry activity in the US appears to be indicating that the US economy is strengthening. The American Chemistry Council’s (ACC’s) Chemical Activity Barometer rose slightly in February on a three month moving average basis – although month-to month figures were flat.

“The increase in chemical industry activity continues to be a good sign for the overall health of the economy,” the ACC’s chief economist, Kevin Swift, said. But he added that uncertainty is still present.

Growth in demand for consumer plastics probably indicated strengthening consumer confidence. There have been gains made in some coatings, pigments and plastics used in construction.

But it is growth in Asia that is vitally important to the sector now.

BASF said that the slump in chemicals production growth last year was the result of weak growth in Asia’s emerging markets in the first half. An upturn was expected in the second six months of the year but deep uncertainty persisted and it did not materialise.

China is the key growth market for chemicals and one which can swing the numbers either way.

In response to questions on Tuesday, Bock said that BASF expects China’s GDP growth to be around 8% in 2013. “Chemical growth will go along with this, which was always slightly above GDP growth.”

The BASF CEO earlier had been cautious when commenting on current business and he suggested that not too much weight should be placed on the slight January upturn.

Other CEOs in Europe this reporting season have been more forthright although this can be put down largely to the portfolios they manage.

Solvay CEO Jean-Pierre Clamadieu two weeks ago, for instance, quite clearly pointed to stronger China demand. “China is strengthening,” he said. “We are seeing in our order book clear signs that China is coming back to growth.”

In a strategy update on 20 February, AkzoNobel CEO Ton Buchner provided some colour to the China situation.

Some growth had returned to his company’s China markets, Buchner said, “not to the levels of the good past that we saw in the early days, but it is returning at growth levels that are significantly higher than those seen in Europe and North America.”

The leveraged effect of only slightly stronger China chemical markets growth in 2013 compared with 2012 would be significant.

Most international chemical companies have been trying hard for years to gain a more significant footprint in the growing Asia and China markets.

BASF reported on Tuesday that its sales to customers in Asia Pacific had grown by just 3.6% in 2012 compared with growth of 15.2% in 2011. The region accounted for 19% of sales by customer location for the company in 2012 compared with 18% for North America, 55% for Europe and 8% for South America, Africa and the Middle East.

BASF’s sales to customers in North America grew by 3.3% last year while its total sales growth was 7.1% to €78.7bn ($102.2bn)

Adding detail to its assumptions for the market environment in 2013, the company said it anticipates only slight growth in EU chemicals production in 2013 of +0.3% before an expansion to average production growth of 1.0%, just under expected GDP growth.

It assumes US chemicals output to grow by 1.9% this year  and in the medium term by 2.3%.

“In Asia (excluding Japan) chemical production in 2013 (+8.1%) will probably somewhat exceed the previous year’s pace of growth. After an economic slowdown in China in 2012, we expect additional growth stimulus from sectors like the construction, automotive, electronics and consumer goods industries. In the medium term, we predict annual growth of around 7.8%.”

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214

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