BASF chemicals earnings to continue falling in Q1 - CFO

Author: Tom Brown

2020/03/03

LUDWIGSHAFEN, Germany (ICIS)--BASF's chemicals division earnings are expected to be weaker in the first quarter, according to the CFO at the Germany-headquartered major.

The warning comes after BASF recorded a difficult 2019 for its commoditised operations.

Prices remain weak for many of BASF's key chemicals and materials products, particularly isocyanates and olefins/polymers, meaning little improvement is expected in the near future, according to BASF CFO Hans-Ulrich Engel.

“If you compare Q1 2020 to Q1 2019, we are at levels significantly below Q1 2019, which is also the main driver for saying we are expecting the chemicals segment overall to be weaker. We have the same situation with respect to cracker products,” said Engel.

“There were still decent prices in Q1 2019 - but throughout the year prices and margins dropped,” he added.

The CFO was speaking on the sidelines of the company’s financial results press conference on 28 February at its Ludwigshafen, Germany headquarters.

Earnings before interest and taxes (EBIT), or operating profit, for the company’s chemicals division – covering petrochemicals and intermediates –and its materials business – covering polyurethanes and polyamides – fell 60% and 59% respectively in 2019.

This represented a combined EBIT before special items drop of €2.2bn to €1.8bn

The extent of the falls in demand and margins for basic chemicals was strong enough to offset gains for surface technologies, agricultural solutions, and a 36% increase in industrial solutions earnings.

Germany-based polyurethanes major Covestro forecast last month that there was little momentum for a rebound in isocyanates pricing in the near future despite prices potentially bottoming out in late 2019.

This is largely BASF’s view, but scope for prices to fall further is dependent on the impact of coronavirus on markets, according to Engel.

“I want to say that prices and margins hit bottom toward the end of 2019 and went with that into 2020. Now we need to see what potential lack of demand, particularly in China, will mean,” he said.

The toluene diisocyanate (TDI) sector has been particularly hard-hit in Europe, with prices falling close to 14-year lows in January.

It is in this extremely long market that BASF has brought its 300,000 tonne/year Ludwigshafen TDI plant online after the latest outage that the company had to deal with.

The unit was completed in 2015.

A defective reactor was replaced with a back-up system that operated at lower capacities, a situation that has been resolved.

The 70,000 tonne/year Schwarzheide, Germany, plant, which the company had planned to take down when work on the Ludwigshafen unit was originally completed, is finally expected to go offline in March, but the new unit offers scope for additional new supplies in a saturated market.

“We will run our TDI plants globally in line with what the market demand is,” Engel said.

The global economy is expected to remain weak this year, and chemicals demand growth is expected at 1.2%, according to BASF data.

It would be the weakest chemicals demand growth since the 2008-2009 financial crash.

THE COMMODITIES GAME
In the absence of any signs of a rebound after the tentative signs of recovery at the start of 2020 have disappeared, the main response commodity chemicals producers can do is to cut costs, run plants efficiently, and await an upswing in the cycle, Engels said.

“This is the game that you need to play in commodities,” he said.

“I still recall the beginning of 2016; I had people asking me will you ever make money again in isocyanates [before record margins in 2017]… Now we're back to trying conditions in isos and you adjust to the extent you can," added Engel.

"You keep your cost in check and you run your plants as efficiently as you can."

The company announced in 2019 a cost-cutting programme that would include the shedding of 6,000 jobs as part of efficiency measures intended to contribute €2bn to earnings before interest, taxes, depreciation and amortisation (EBITDA) by the end of 2021.

The current harshness of market conditions has led the company to accelerate its downsizing programme, which is to be complete by the end of the year now.

BASF is also reorganising its corporate structure to be more "customer-focused".

BASF did not take part in some of the big transformational M&A trends in the industry in 2016 and 2017, with deals like Bayer's acquisition of US agrochemicals major Monsanto or the merger between Dow and DuPont.

The company has quietly but significantly shifted its focus in the ensuing year, through the spin-off of its oil and gas operations into majority-held joint venture Wintershall Dea and the €7.6bn purchase of a sheaf of agrochemicals assets from Bayer.

It plans an initial public offering (IPO) planned for Wintershall Dea later this year if markets allow and the expected close of its pigments and constructions chemicals

UP TO €8BN
The divestments and IPO in 2020 will bring BASF close to its target of €8bn in portfolio adjustments, according to CEO Martin Brudermueller.

“The business has never experienced so many portfolio changes before,” he said, speaking to reporters in Ludwigshafen on 28 February.

The acquisition of Bayer assets has drawn BASF into some of the legal woes its Germany-based peer has experienced in the US, with both companies implicated in a $265m Missouri court verdict on herbicide dicamba.

With several other legal actions ongoing on the product, the company may need to fight other cases, but BASF management went out of its way to restate support for the purchase in its full-year financial results statement.

“The assets and businesses acquired from Bayer performed very well,” the company said in an earnings statement.

The agrochemicals expansion and oil and gas sell-off are part of a fundamental shift in the company’s axis.

Oil and gas earnings helped to balance financials by functioning as a balance to downstream performance, with upstream earnings soaring in a high crude price environment as petrochemicals margins fell.

BASF’s reliance on the division had fallen over the last decade, which former chief Kurt Bock attributed to stronger chemicals division and the sale of its natural gas trading business.

The expansion into the agricultural sector potentially offers a seam of more stable earnings that will offer more predictable performance, in place of n arm that waxes and wanes with the oil price, according to Engel.

“I think that what you'll see then is that overall earnings stability and earnings level will be higher less cyclicality in the portfolio,” said the CFO, noting that company downstream earnings are increasingly able to compensate for slower upstream performance.

BREXIT ADDS TO WOES
Aside from coronavirus and the US-China trade war, which the company predicts could slash China GDP to 4.5% this year, the UK’s exit from the EU remains a substantial source of uncertainty for European chemicals players.

BASF has estimated that the cost of re-registering the 1,300 substances that it has identified as necessary under a UK Reach system would cost it £75m and, within the timelines given, require the dossiers to be assembled and filed at a rate of three a day to meet the two-year deadline.

Given the projected costs of re-registration, if necessary, a move to a separate UK chemicals regulatory framework could prompt the company to examine the range of products it sells into the country.

“What we certainly hope for is that any type of UK regulation will be very close to or equal to what we have currently in the EU… if we have to re-register completely then we would certainly look at the portfolio that we're selling in the UK,” Engels added.

Front page picture: BASF's CEO Hans-Ulrich Engel (left) and CEO Martin Brudermuller
Source: Ronald Wittek/EPA-EFE/Shutterstock 

Interview article by Tom Brown