BASF not expecting demand upturn in fourth quarter

(adds chairman Q4 outlook and segment financials)

LONDON (ICIS)–BASF does not expect an upturn in demand in the fourth quarter of 2014, Kurt Bock, chairman of the Germany-based producer said on Friday in the group’s interim report telephone conference.

He added the company has cut its 2014 chemicals production forecasts to 4.0% from 4.4%; and reduced global GDP growth predictions to 2.3% from a previously expected 2.5%.

BASF also expects the average oil price of Brent for the year to be $105/bbl, down from $110/bbl previously forecast.

“We assume that the environment will remain volatile and challenging,” Bock said.

“We nevertheless still aim to slightly raise our EBIT [earnings before interest and tax] before special items for the year 2014. Sales are likely to decrease slightly as a result of the divestiture of the gas trading and storage business planned for this year in addition to negative currency effects,” he added.

Earlier on Friday, BASF reported that its net profit fell by 4.8% year on year to €1.04bn in the third quarter of 2014, weighed by a higher tax rate and increased minority interests.

The company’s sales rose by 3.3% year on year to €18.3bn in the third quarter, while earnings before interest and taxes (EBIT) before special items were up 8.9% at €1.84bn.

“The economic environment remained challenging in the third quarter of 2014. Geopolitical tensions and increasing uncertainty about the global economic development significantly dampened demand for chemical products,” said Bock.

“Macroeconomic indicators in Europe and South America started to turn negative. In Germany, the Ifo Business Climate Index fell for the fifth month in a row; expectations for the next six months are now negative. Brazil is in a recession,” he added.

“On the positive side, North American GDP expanded somewhat faster than expected. In China, growth continued to slow further. The recovery in Japan was moderate. Growth in most ASEAN states was also restrained. The lower oil price is an indicator for this overall weaker growth,” Bock said.

On a regional basis, sales BASF companies located in Europe grew by 3% compared with the previous third quarter, mainly because of considerably higher volumes in the Natural Gas Trading business sector; although sales volumes in the Chemicals and Agricultural Solutions segments declined, Engel said.

“We achieved a considerable increase in sales and volumes in the Catalysts division. In the Petrochemicals division, lower plant availability dampened sales. EBIT before special items rose by €202m to €1.13bn, primarily due to considerably improved contributions from Chemicals, Oil & Gas, and Other,” he added.

In North America, sales rose by 3% mainly on volume and price-related sales growth in the Petrochemicals division. “At €342m,earnings decreased slightly, due in part to a considerably lower contribution from Agricultural Solutions [third quarter of 2013: €355m],” Engel said.

Sales in Asia Pacific increased 4% on higher volumes, especially in the Catalysts and Performance Chemicals divisions.

“At €173m, earnings were €33m below the level of the third quarter of 2013. This was largely the result of considerably lower earnings from basic products in the Chemicals segment,” Engel added.

In South America, Africa, Middle East, sales grew 4% in euro terms as negative currency effects could be more than compensated for, mainly through higher prices.

Earnings in region dipped €6m to €197m as a consequence of weaker margins and strong competition from generic insecticides in the Agricultural Solutions segment.

In terms of segment performance, third-quarter sales in BASF’s Chemicals business of €4.20bn were level with the previous third quarter.

Hans-Ulrich Engel, CFO of BASF, said the market environment in Asia was difficult, while in Europe, sales volumes declined, although there was sharp volumes growth in the Petrochemicals division in North America.

The segment’s EBIT before special items of €616m beat out the prior third-quarter level by €89m, mainly due to higher margins in the Petrochemicals division.

In the group’s Performance Products segment, third-quarter sales were €3.92bn, level with the same quarter last year as volumes and sales prices remained stable while currency effects were negative.

“We were able to significantly increase volumes in the Performance Chemicals division. In the Paper Chemicals division, however, lower volumes led to a considerable decline in sales. We reduced our fixed costs, thanks in part to restructuring measures,” Engel said.

The segment’s EBIT before special items of €376m matched the level of the previous third quarter.

In the Functional Materials & Solutions segment, sales exceeded the level of the third quarter of 2013 by 2% at €4.53bn.

“We raised prices in most business areas, more than compensating for negative currency effects. Demand remained strong from the automotive industry, especially in the Catalysts division,” Engel said.

EBIT before special items rose by €10m to €310m, mostly through higher contributions from the Coatings and Catalysts divisions, he added.

BASF’s Agricultural Solutions segment, saw sales fall 3% below the third-quarter level of 2013 to €1.02bn. Engel said falling crop commodity prices and correspondingly cautious purchasing behavior were noticeable in nearly every market.

He added that EBIT before special items fell €129m to €43m year on year, because “in addition to lower volumes, this was largely a result of falling margins due to a less favorable product mix as well as increased expenses for research and development, production and distribution.”

Sales in the Oil & Gas segment in the third quarter grew 17% year on year to €3.67bn on higher volumes in the Natural Gas Trading business sector, despite lower oil and gas prices. This lead to EBIT before special items rising €82m to €504m over the same period.

For the first nine months of this year, the company’s total net income rose by 3.2% to €3.82bn, while sales were up 0.8% at €56.3bn.

The chairman also announced BASF will not hit the 2015 financial targets part on the back of reduced growth dynamics of emerging markets and a delayed recovery in the European economy.

Part of its ‘We create chemistry’ strategy originally published in 2011, the company aimed in 2015 to make sales of €80bn and Earnings before interest, tax, depreciation and amortisation (EBITDA) of €14bn.

Speaking in a telephone conference, Bock said: “It looks like we will not achieve our ambitious financial targets for 2015.”

“Early this year we said that hitting these targets would require an economic recovery in major markets, especially in Europe, and a margin improvement for some of our major basic products,” he said

“This has not happened; we have seen a further weakening of the economic environment,” he added.

Additional reporting by Nurluqman Suratman