BASF’s shocking Q2 results should have been no shock at all

Aromatics, Business, China, Company Strategy, Economics, European economy, European petrochemicals, Technology, US

y John Richardson

NOBODY should be surprised by the BASF results for Q1 2019 where, on a year-on-year basis, EBIT was down by 71%. This was largely because of events in China.

The roots of these very poor results, with many more likely to follow from other chemicals companies, can be traced back to H1 2018. It was then when the ICIS Asian Chemicals Connection blog first identified the slowdown in the Chinese economy due to a sharp reduction in credit growth. With China responsible for more than a third of global demand across most chemicals and polymers, it was clear that reduced lending would have major worldwide implications.

Most mainstream analysts argued that China would soon ease back on its lending restrictions. We said the opposite because of our belief that the Chinese government was determined to tackle excessive bad debts. China, we contended, had also gone beyond the point of no return where each Yuan of new debt was delivering such low benefits to GDP that the debt-fuelled growth model of 2009-2017 was no longer viable. This has proved correct with real lending conditions, when repayments of debt are taken into account, remaining tight in H1 of this year.

We predicted as early as January 2017 that the trade war could only get worse because of a long term bipartisan shift in the US view on China. Republicans and Democrats were united in a new belief that China was an adversary rather than a partner on not only trade issues, but also in the areas of technology and geopolitics, we said. This of course has happened, acting as a further drag on the Chinese economy and the BASF Q2 results.

BASF highlighted the 13% fall in China auto sales in H1 2019, again on a year-on-year basis, as a major factor behind their poor financial performance. We were pretty much alone in March this year of predicting no recovery in the China autos market after the 2018 fall in sales – the first annual decline in sales since the early 1990s. Our argument was that as lending remained tight, affordability would drive a big rise in second-hand car sales. We also said that the rapid ageing of China’s population would be another critical factor behind slower sales of new cars and a slower economy in general. Most analysts now see at best flat new-car sales growth in 2019.

Very simple measures of the strength of chemicals markets, which we have been providing on a regular basis since early 2018, provided a further pointer towards the BASF results. Take as an example the above chart which shows CFR China benzene pricing spreads over CFR Japan naphtha costs. As you can see, up until the end of May, spreads were at their lowest level since 2001. Benzene is of course a key building block chemical with many uses downstream into the derivatives produced by BASF and other chemicals companies.

What happens next? I believe the global chemicals industry is at risk of a significant downturn, if not a recession. Contact ICIS, your essential data and analytics supplier, to track what this means your company.

PREVIOUS POST

Multiple trade disputes and the risks for the US PE industry

03/07/2019

By John Richardson FALLING out with a trading partner as big as China is problem...

Learn more
NEXT POST

The blog is on holiday but whilst on leave we will support ABS demand

11/07/2019

We will return on 29 July      

Learn more
More posts
Why a hard look at the data show China has not seen a V-shaped recovery
06/08/2020

          Note: All the data comparisons below are year-on-year By John Ric...

Read
China moves closer to Iran as tensions with the US build: Implications for petrochemicals
02/08/2020

By John Richardson Opinions and emotions and can shape how we interpret data, but, as we all know, o...

Read
China polyolefins market H1 review: so far so good, but beware of the risks ahead
30/07/2020

By John Richardson ALL looks fine in the polyolefins world. The Old Normal appears to have reasserte...

Read
Polyethylene market recovery could be threatened by slower China crude buying, weaker economic growth
28/07/2020

By John Richardson EVEN by China’s standards, where just about every number is eye-wateringly larg...

Read
Why the polypropylene industry must switch from volumes to value
26/07/2020

By John Richardson EVERYONE knows about the oversupply in the polyethylene (PE) market as it has bee...

Read
China consulate closure underlines long-term split with US, potential big shift in petchems trade flows
23/07/2020

The views in this blog post are, as always, my personal views and do not reflect the views of ICIS. ...

Read
China’s real GDP could have been negative in Q2: What this may mean for PP
22/07/2020

By John Richardson CHINA’S official GDP growth of 3.2% for Q2, which was announced last week, may ...

Read
Iran and China new deal could hasten Belt & Road Initiative petrochemicals self-sufficiency
19/07/2020

By John Richardson ONCE AGAIN, please don’t say I didn’t tell you. A proposed new investment and...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more