INSIGHT: BASF demonstrates value of Verbund in weak environment

26 April 2013 16:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--In chemicals, integrations help, particularly when raw material cost prices are moving and end-use markets are poor. But at the same time, there is a lag in passing on higher costs in product prices or in making raw material cost savings downstream. The positive effects are diminished when end-use markets are poor.

Germany-based chemicals major BASF demonstrated this on Friday as its highly-integrated Verbund structure delivered stronger operating earnings for the first quarter despite relatively subdued sales growth.

The chemical giant’s operating profits beat financial market consensus estimates with gains in chemicals greater than expected and a lift from agriculture. The downstream Performance businesses did less well as did those that are more customer-oriented.

BASF aims to beat last year’s outturn in sales and EBIT (earnings before interest and tax) before special, or exceptional charges and gains in 2013 but is not banking on a great deal of help from global markets. It has forecast global GDP growth in 2013 of 2.4%, industrial production growth of 3.4% and a slight premium in chemicals growth of 3.6%. It is planning on an average oil price for the year of $110/bbl.

Group sales in the first quarter were up 4.8% at €19.7bn ($25.6bn) with EBIT before special items up 10.1% at €2.2bn.

Earnings at this level were higher in the Agriculture businesses year on year, lower in Oil & Gas and up in Chemicals.

The chemicals business currently is tough for every player with downstream market demand weak in an uncertain global economic environment. The situation in Europe is poor generally and oil-related costs are high.

Yet BASF managed to push its Chemicals segment EBIT before special items up by a significant 16.9% year on year to €650m in the quarter, largely on higher margins. Sales were down 2.6% at €4.40bn.

First-quarter sales declined 2.1% to €3.88bn in the Performance Products segment, mainly because of lower sales prices and negative currency effects, while EBIT before special items fell 16.2% to €379m.

BASF’s Functional Materials & Solutions segment saw its sales flat with first-quarter 2012 levels, at €4.18bn, although EBIT before special items dropped 7.0% year on year to €239m, partly because of a lower contribution from catalysts.

The chemicals result, possibly, was surprising but showed how a chemical company is able to make gains if it can either hang on to raw material cost decreases or cost increases downstream.

Looking back over the first quarter, European naphtha prices averaged $937/tonne, down 8.0% from the first quarter 2012 average of $1,019/tonne while petrochemical producers were able to push prices higher. The ICIS Petrochemical Index, or IPEX, for Europe rose by 2.7% over the same period.

The IPEX product basket comprises ethylene, propylene, benzene, toluene, paraxylene (PX), styrene, methanol, butadiene (BD), polyvinyl chloride (PVC), polyethylene (PE), polypropylene (PP) and polystyrene (PS). BASF makes the high volume, upstream chemicals on the list but not the polymers.

The company said on Friday that the market environment for its chemicals businesses in the first quarter was “varying” and while sales were down, mainly because of scheduled and unscheduled plant shutdowns in petrochemicals, margins were much stronger.

“Sales in the Petrochemicals division were below the strong level of the first quarter of 2012,” it added.

“Scheduled and unscheduled plant shutdowns led to a decline in volumes, particularly for steam cracker products. We raised sales prices in almost all product lines, thus passing high raw material costs on to our customers. We achieved significant margin-driven earnings improvement.”

Profits from the company’s Monomers division also rose significantly as prices were pushed higher and volumes improved.

Isocyanates sales, for instance, were higher globally, BASF said with MDI and TDI stronger. These chemicals are pre-cursors for rigid and flexible polyurethane foams.

BASF’s ammonia margins were better too although margins for caprolactam, used principally in the nylon value chain, were weaker.

Demand was higher for some of BASF’s Intermediates division chemicals too, the company said, with the butanediol and derivatives business sector particularly contributing to this alongside acids and specialties. Prices were lower, though and margins were under pressure.

This may be a snapshot view of a quarter with little certainty in either oil-based raw material prices, or industrial- and economically-driven demand growth but one which demonstrates that more than a little integration can help.

In the current quarter, chemical producers, particularly those in Europe, continue to face weak downstream market demand but they also have to manage feedstock cost volatility.

Naphtha prices dropped sharply in early April raising concerns about the sector’s ability to hold on to product prices in a declining market.  

The average naphtha price in Europe thus far in April is $812/tonne, which is 13% lower than the first quarter average. The IPEX for Europe is down just 3.3% over the same period.

Downstream market demand will play a large part in the ability of players in many petrochemical value chains to hold on to product prices and margins.

The European monthly contract price for ethylene for May settled down $100/tonne, or 7.9%, according to ICIS reports on Friday.

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214

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