German majors finally fall prey to recession

29 March 1993 00:00  [Source: ICB]

GERMANY'S CHEMICAL companies witnessed a marked downturn in fortunes during 1992 and expect business conditions to worsen significantly this year, according to the big three groups. The triumvirate of BASF, Bayer and Hoechst all saw profits slump in 1992 and have cautiously trimmed their dividends, while bringing forward redundancy programmes this year.

The three companies' results suggest a dramatic collapse in demand occurred in the second half of 1992 - and particularly in the last four months of the year, after the devaluation of a number of European currencies. Indeed, the groups suffered a progressive fall in sales volumes after Q1 last year, which is continuing into 1993. This has prompted greater efforts to reduce costs; in particular the first large-scale compulsory redundancies are now in prospect.

Up to the spring last year, the German companies had enjoyed relatively robust demand levels, reflecting the strong domestic economy. Profits, while having come under pressure on two fronts -rising fixed costs and falling margins -had not borne the brunt of the third 'volume' effect.

This materialised in the year, particularly after the currency turmoil of September, which substantially hit exports. The appreciation of the deutschmark was just 2.5% over the year on an (EC) trade-weighted basis but 6.7% in the last four months of 1992.

Over the first two months this year, all three companies recorded significant falls in sales volume and turnover, albeit in comparison with still strong results from early 1992.

BASF's group sales were down by 10% in January and February, while those of the parent company - which has a higher gearing to Germany - were 17% lower. Bayer said group sales volumes and turnover declined by 8% and 11% respectively in the same period. Hoechst said that foreign turnover had dipped 2% and domestic sales slumped 15%, bringing the reduction for the group as a whole to 5% up to February.

Domestic pharmaceuticals operations were amongst those worst hit (ECN 29 March p6), with sales down by as much as 40% in some cases since the New Year, as a result of recent reforms to the German healthcare system.

Other areas which continue to be depressed include agrochemicals, particularly crop protection products in Europe, where the market is still disrupted by the CAP reforms.

All three companies reported lower capacity utilisation this year, indicating it had sunk to a level of around 70% for the first time since the early 1980s.

The prospect of further erosion to the competitiveness of European manufacturing operations also appears to have prompted consideration of more widespread restructuring, particularly in Germany. BASF, Bayer and Hoechst indicated a greater willingness to participate in larger-scale restructuring of the industry, through portfolio swaps and joint ventures.

Furthermore, the escalating environmental burden in Germany and high labour costs also remain a problem. Bayer's chairman Dr Manfred Schneider warned it was doubtful that organic intermediates and textile dyestuffs could be manufactured competitively in Germany in the long term in the face of low-cost competitors from Asia.

BASF's chairman, Dr Jürgen Strube, similarly noted the changing patterns of international trade - citing the aggressive tactics of chemical producers in central Europe and the CIS exporting into west European markets - as a force for re-orientation of the industry. Strube, however, regards this prospect as 'much an opportunity as a threat'.

BASF results for 1992

Last year BASF's sales fell by 4.5% to DM44.5bn ($22.7bn). The group also suffered the greatest fall of the three companies in pre-tax profit, down 41% to DM1.24bn. The fall in sales reflects a combination of higher sales volumes (+2%), offset against reduced selling prices (-6%) and currency fluctuations (-1%). BASF reported that the selling price index for its parent company fell by 10% points over the year. Smaller effects include the increase in petroleum revenue tax (+0.5%) and the net effect of acquisitions and divestitures (+0.3%).

The surprising increase in sales volumes was entirely attributable to the first half of last year, and masks the collapse of the second half. At the end of June, BASF said sales volumes were 5% higher but fell steadily later in the year. Over Q4, volume sales were down by 3%.

North America accounts for a substantial portion of the currency-related effect on sales, reflecting the 6% depreciation of the dollar. BASF's acquisition of Mobil's polystyrene operations in the US last year largely balanced the divestiture of Wintershall Energy (USA) and Knoll's infusion and dialysis business.

Sales fell back in all of the group's divisions, except oil and gas - which itself only achieved a higher turnover because of the rise in German petroleum tax.

Among the other divisions, agriculture products suffered the slump in agricultural consumption in Europe, combined with adverse weather conditions. Kali und Salz incurred significant losses, because of the low dollar exchange rate and aggressive pricing by CIS producers.

The plastics and fibres divisions experienced a fall in demand from the mid-year, which was combined with lower price levels. Earnings were further eroded, particularly in commodity plastics, composites and fibres.

In the chemicals division, all businesses except fine chemicals turned in poorer results. The division was pressured in basic chemicals, where margins fell for cracker products and ammonia, and also in fire intermediates, especially in Q4.

BASF's dyestuffs and finishing products held up, although prices for acrylic monomers dropped sharply. Volumes of dispersions increased slightly and earnings in speciality chemicals were described as satisfactory.

In consumer products, BASF blamed significant losses in the magnetic media business on predatory pricing by competitors. Coatings and paints remained stable and earnings for Knoll matched the 1991 level. Only three of BASF's six divisions recorded profits in 1992, and at least nine key group companies traded in the red: BASF Antwerpen, BASF Magnetics, BASF plc (UK), BASF Schwarzheide, Kali und Salz, BASF Corp (US), BASF Brazileira, BASF France and BASF Japan. The majority of group operating earnings came from Europe and 70% from BASF AG.

BASF Group 1992 results (DMm)
Division	Sales	Change,%	Op profit	Change,%
Oil and Gas	6872	1.0	(38)	NM
Agriculture products	4671	(9.4)	45	(64.5)
Plastics/fibres	9092	(4.9)	(119)	(138)
Chemicals	6699	(4.2)	881	(14.5)
Dyestuffs/finishing	7638	(4.8)	600	(13.0)
Consumer products	8824	(3.9)	(103)	129
Other	816	(17.9)	45	(89.3)
Region (by location of companies)
Europe	34 057	(5.2)	1318	(35.2)
North America	7500	(4.0)	(58)	(185)
Latin America	1730	(1.4)	20	(70.0)
Asia, Australia, Africa	1235	8.2	31	29.2
Total	44 522	(4.5)	1311	(39.8)

 

Hoechst Group 1992 results (DMm)
Divisions	Sales	Change,%	Op Profit	Change,%
Chemicals/colour	10 580	(4.9)	321	(36.5)
Fibres	6945	(3.0)	422	(2.3)
Polymers	8020	(6.7)	97	(59.2)
Health	10 817	4.1	1258	1.9
Engineering/tech	6817	(5.3)	11	(94.3)
Agriculture	2691	(0.9)	42	(76.1)
Regions
EC	30 969	(3.2)	1061	(39.1)
Other Europe	1179	(4.2)	59	(18.0)
North America	10 434	1.2	587	(6.1)
Latin America	3129	(4.5)	215	44.3
Africa, Asian, Aust	3665	3.5	230	19.8
Total	45 870	(2.7)	2152	(22.2)

 

Bayer Group 1992 results (DMm)
Divisions	Sales	Change,%	Op profit	Change,%
Polymers	7198	(7.5)	(37)	NM
Organic products	5472	(5.1)	121	(14.8)
Industrial products	7579	(2.6)	275	(34.7)
Healthcare	8928	1.4	1819	4.8
Agrochemicals	5154	(3.5)	378	(21.3)
Imaging technology	6864	(0.9)	220	(25.7)
Regions
Europe	26 538	(4.1)	1600	(27.9)
North America	8759	(0.1)	620	49.0
Latin America	1842	(3.6)	116	(4.9)
Asia	3423	0.5	383	3.2
Africa	633	(4.1)	57	14.0
Total	41 195	(2.8)	2776	(12.6)

The indications for 1993 are, if anything, worse. Strube said German economic activity has deteriorated further and a similar trend is evident across most of western Europe. However, in North America, the economic revival, which restarted in the second half, continues to strengthen.

Bayer results for 1992

Bayer's sales fell by almost 3% in 1992 to DM41bn, while pre-tax profit declined by 16% to DM2.693bn. Bayer added that its profits were depressed by 'structural costs' of DM550m last year, of which DM250m reflects early retirement.

The decline in sales was attributable to the currency effect (-3%) and reduced selling price (-2%) - mainly in the polymers, organic chemicals and industrial products sectors - which was offset by small volume growth (+1.9%).

The decline in sales was spread across virtually all regions; however, business was particularly weak in Europe. The decline in sales of the major west European markets varied from 7% in the UK to 1% in the Nordic countries. There was a further substantial fall in sales to Russia, but Bayer noted the first signs of a recovery in Poland and the Czech Republic. Sales to eastern Europe reached a new low of DM450m in 1992, contrasting with DM1.3bn in 1988. The 1% decline in sales in North America was entirely due to currency translation effects.

Healthcare was the only division to increase sales in 1992, with both pharmaceuticals and self-medication recording higher turnover. However, diagnostics lost ground, although Bayer suggests that restructuring is now beginning to bear fruit.

The polymers sector suffered a sharp drop in demand in the plastics and rubber business groups. Also, charges related to last year's closure of the Tedur PPS facility in Antwerp depressed results. The fibres business remained in the red because of losses on the acrylic fibre Dralon, although the spandex fibre Dorlastan performed well.

In organic products, Bayer reported that business in the organic intermediates remained unsatisfactory, although earnings in the organic chemicals division improved. A higher loss was recorded at EC Erdölchemie, the petrochemicals joint venture with BP, reflecting the slump in petrochemical prices. The Haarmann and Reimer group improved results, recording an encouraging rise in earnings in fragrances, flavours, aroma chemicals and the citric acid business.

In industrial products, Bayer said the weak earnings position applied to virtually all business units, except coatings, raw materials and speciality products. Earnings in the inorganic chemicals unit were reduced by the cost of shutting down the production plants for sodium dichromate, while the lower earnings in polyurethane was caused by weaker price levels.

In the agrochemicals sector, sales slipped 4% due to weak demand for crop protection products, a weather-related fall in demand and a significant decline in business with eastern Europe. The animal health and consumer products divisions improved earnings. In the imaging technologies sector, sales almost matched that of 1991 as adverse currency movements masked a 5% improvement in volumes. Earnings of the graphic systems business group increased, while those of photographic products were reduced by price erosion. Profits from imaging technologies were depressed by extraordinary charges.

Hoechst results for 1992

Hoechst reported a significant 23% drop in operating profit to DM2.152bn for 1992, essentially due to a 64% slump by the parent company Hoechst AG. Chairman Professor Wolfgang Hilger expressed alarm over the deteriorating conditions in Europe, particularly in Germany, which have continued to make a 'miserable' start to 1993.

Sales for the group were down 2.8% last year to DM45.9bn. The benefits of a 0.8% increase in sales volumes and the inclusion of four newly consolidated businesses were outweighed by price falls of 1.5% and a 3% drop due to currency translation. The return on sales dropped to 4.6%, compared to 10% in the peak years of 1988 and 1989.

Hilger emphasised the effect on the 1992 earnings from some DM771m spent on restructuring and rationalisation -including DM374m for the parent company alone - which are likely to be required again this year. But the profit figure also included proceeds from the sale of Sopharga by Roussel-Uclaf, which commanded a 'good price'. In all, group net income was down 13% to DM1.2bn.

Only Hoechst's health business managed to increase operating profit, while severe declines were experienced by engineering/technology and agriculture. Polymers also suffered, with losses in bulk plastics and PE films. The fibres division did poorly in western Europe -particularly at Guben which lost DM64m - but was bolstered by sales increases gained by Hoechst Celanese in North America.

Within engineering/technology, where operating profits were down 95% to DM11m, only the industrial gases business was in the black, with losses sustained by carbon products, engineering ceramics, plant engineering, technical specialties and welding technology.

Hilger expects the Q1 result for the parent company to be an improvement on the slight loss experienced in Q4 1992 but forecasts a further decline in earnings for the first six months.

ICIS Copyright © Reed Business Information 2009

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