BASF sees “massive decline”

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6 weeks ago, I warned that “the scariest moment of my 30 year chemical career” was about to be repeated. This had been in 1980, when “for some weeks it seemed that demand for many petchem products had simply stopped”.

Three weeks later, the blog confirmed that “the moment it had long feared has now begun to happen. Everyone in the chemicals value chain suddenly realises that they have been living in a parallel universe. Whilst they have been building inventory in advance of future oil price-related increases, demand in the real economy has been collapsing.”

The first company to report this “moment” was Celanese, whose chairman told analysts “basically, orders just stopped”. And as the blog then forecast, this “moment” has since been “repeated in other product areas and in other regions”, with the effect being magnified as “customers aim to keep working capital low for year-end reasons”.

The blog went on to advise that “now, the task is simple. Those of us who had the misfortune to be around in 1980, at least know what needs to happen next. Supply and demand need to be rebalanced to today’s lower level of demand as quickly as possible.”

Today BASF have experienced the “moment”. Chairman Dr Jurgen Hambrecht announced that “customer demand in key markets has declined significantly” since the end of October, whilst “sales volumes are being impacted by increased reduction of inventory by customers”.

In response, BASF are following exactly the policy advised by the blog, and are “temporarily shutting down around 80 plants worldwide…and reducing production at approximately 100 plants”.

The blog salutes BASF for their courage in taking this painful but necessary step. Clearly, there will now be a final period of inventory reduction down the chain, as CFOs insist that companies end the year with maximum cash on the balance sheet.

But the blog would counsel against keeping inventory too low. In January, the auto companies and other key industries will start operating again, after their extended shutdowns, and demand will return again.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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