INSIGHT: BASF will have to work harder to perform in the second half

25 July 2013 18:04  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--BASF does not expect much growth in the second half, its CEO Kurt Bock said on Thursday.

Releasing a set of second quarter financial results that came in below most analysts’ expectations, the company said it sticks with its earnings target for the year, but expects to have to work harder to reach it.

“We expect the development of the second half to be rather flat compared to the first half of 2013,” Bock said, clearly indicating that there is unlikely to be any sequential growth – it saw a contraction between the first and second quarters.

BASF does not see any momentum in incoming orders for July and August, Bock said. The company is doing reasonable business in China but, combined with slow growth in the US and the flat economic situation in Europe, there is not much room for manoeuvre.

It is not wise to read too much into quarterly performance but the BASF results do reflect the impact of a margin squeeze on caprolactam and polyamide in chemicals, and intense competition in the Performance Products business, which includes dispersions and pigments, and personal care products.

Globally, the petrochemicals business did better in the quarter, although sales were down. However, sales were higher for methyl di-p-phenylene isocyanate (MDI) and toluene di-isocyanate (TDI).

BASF’s growth in the quarter came from Functional Materials & Solutions which includes coatings, catalysts and construction chemicals; from Agriculture Solutions and Oil & Gas. The company’s STEP cost reduction programme helped raise margins in the construction chemicals business, for example.

The fact that BASF has slowed its planned increase in recruitment in emerging markets but kept up the pace of job creation in Germany shows how the outlook has changed. Earnings before interest and tax (EBIT) before any extraordinary charges and gains were down by 19% in Europe and by a significant 43% in Germany year on year in the quarter but earnings were also down by 12% in Asia Pacific.

Regionally, the strongest earnings growth (of 48%) came in North America. The numbers have been influenced, however, by the shutdown of the Port Arthur, Texas joint venture cracker in May and June last year. There were problems with product supply from a joint venture acrylates plant in Malaysia in the second quarter of this year.

Overall, the company is not dissatisfied with its performance in chemicals in Europe. In Asia, cost structures are being reviewed as is the way in which BASF does business.

“Due to uncertainty about further business development, the increase in personnel particularly planned in emerging markets will proceed more slowly,” Bock said in a teleconference with journalists on Thursday.

“In addition to portfolio measures and investments, it is also necessary in a challenging environment to keep a tight rein on costs. Our excellence programme STEP, which as of the end of 2015 is expected to contribute around €1bn to earnings each year compared with the base year 2011, is running on schedule. We will achieve savings of €300m ($395) this year.”

BASF’s planning assumptions show how cautious it has become.

Overall, it expects global chemicals production to grow by 3.1% this year. In February it was forecasting chemicals production growth (excluding pharmaceuticals) of 3.6% in 2013, from 2.6% in 2012. It was overly optimistic at the start of 2012 too when it was talking about chemicals production growth for the year (2012) of 4.1%.

The reining back of expectations will have a consequence for the company, as will the challenging competitive environment, particularly in some of the Performance Products businesses.

BASF’s underlying assumptions for the year are always worth mulling over.

Its global GDP forecast for 2013 has been cut to 2.0% from 2.4%, with its industrial production forecast down to 2.7% from 3.4%. It sees a slightly lower average oil price of $105/bbl from $110/bbl earlier.

“At just under 2%, global gross domestic product grew more slowly in the first half of 2013 compared with the same period of the previous year,” Bock said.

“Global industrial production only rose by around 1% over the same period. In the eurozone, industrial production stabilised over the first half of the year, but consumer confidence and the business climate remained at a low level.”

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By: Nigel Davis
+44 20 8652 3214

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