Weak demand, tepid petchems weigh on BASF Q1 profits

Source: ICIS News

2019/05/03

LONDON (ICIS)--Weaker demand from key end markets, geopolitical tensions and substantially lower petrochemicals sales weighed on BASF’s earnings in the first three months of 2019, with a bearish outlook for the second quarter, the CFO of the German chemicals major said on Friday.

Automotive remained weak in the first quarter. Picture source: BASF

The quarter was “as difficult as we had expected”, according to CFO Hans-Ulrich Engel, noting a slowdown in key customer end markets, particularly the automotive sector, as well as dampened demand from China on the back of the trade war with the US, as well as Brexit uncertainty in Europe.

“Global economic growth continued to be negatively impacted by geopolitical developments and the ongoing trade conflicts between the US and its trading partners,” Engel said, speaking on an analyst call.

“The overall cautious market sentiment persisted. As a result, BASF experienced a slowdown in demand from key customer industries, particularly automotive,” he added.

Automotive demand dropped 6% year on year, while petrochemicals earnings declined on the back of lower volumes from preparations for the heavy turnaround schedule for the second quarter of the year.

Lower capacity utilisation at the company’s Port Arthur, Texas, condensate splitter also hit division profitability, while a sharp fall in isocyanates pricing drove a 60% fall in materials division earnings.

Volumes development in the intermediates division was dampened by “customer reticence” in the automotive, coatings, textile and wind turbine industries, along with a more subdued demand tan usual around the Chinese New Year holiday.

€ million Q1 2019 Q1 2018 % change
Sales 16,177 15,700 3.0
Income from operations (EBIT*) 1,758 2,263 -22.3
Net Income 1,406 1,679 -16.3
*Earnings before interest and taxes

Pricing fell 2% year on year during the quarter, while foreign exchange (forex) conditions improved over the same period, despite the impact that many European producers reported from currencies at the start of 2019.

The outlook is also weak for the second quarter of the year, particularly for chemicals operations, on the back of significant maintenance shutdowns set for Port Arthur and Antwerp, Belgium, scheduled to continue into the second half of 2019.

The company is also going to struggle with comparisons to an extremely strong second quarter 2018, he said, despite the year on year dip in profits seen at the time, as the company was still benefiting from prevailing strong pricing for isocyanates, which has since normalised.

BASF Q1 divisions EBIT*
(€m) Q1 2019 Q1 2018 Change (%)
Chemicals 302 470 -36
Materials 321 811 -60
Industrial solutions 407 248 64
Surface technologies 150 154 -3
Nutrition & Care 124 248 -50
Agricultural solutions 772 417 85

Despite expectations for a challenging second quarter, margins are gradually improving, particularly in comparison to the closing months of 2018, Engel added.

“We have worked on pricing across the board and that has a positive effect,” he said.

“Raw material prices in the first quarter also helped with this margin development, [although] volumes did not necessarily cooperate.”

Catalysts business is improving, driven by stronger battery materials demand, although the extent of the uplift is expected to become more apparent in the second half of the year, while coatigns business demand is also expected to gradually improve.

“Some [companies] are already talking about green shoots in Asia and China. For me, it’s too early to say,” Engel said.

EBIT for 2019 is still expected to be above the level seen in 2018, but at the lower end of the forecast range, buoyed in part in comparison to €250m in costs in the second half of last year as a result of low River Rhine water levels.

The company is projecting 2.8% global GDP growth this year, while chemicals and wider industrial production are projected to grow 2.7%, and average Brent crude oil pricses to stand at around $70/bbl, Engel added.

“Our outlook continues to assume that the trade conflict between the US and its trading partners will ease over the course of the year, and that the potential Brexit will not cause wider economic repercussions,” he said.

“Furthermore, we assume that our customer industries will maintain their growth trajectory,” he added.

(Update: re-leads, adds management commentary, division performance, forecasts)