BASF mulls impairments on new normal lower demand, China on V-shaped recovery - CEO

Author: Jonathan Lopez

2020/07/29

LONDON (ICIS)--The “extreme scenario” caused by the pandemic makes even short-term forecasts impossible, but petrochemicals demand may decrease in the long-term in the new normal and BASF is mulling impairment charges on its assets, the CEO at the German chemicals major said on Wednesday.

BASF’s operations in China are recovering from the lows in the first quarter, when the pandemic first hit, and it is “the only country” in the world where a V-shaped recovery is taking place, said CEO Martin Brudermuller.

Earlier on Wednesday, BASF’s second-quarter financial results showed the extent of the downturn in the second quarter; selling prices only fell 1% on average as some business divisions – agrochemicals, care, and nutrition – offset larger falls in industrial sectors, but sales volumes fell 7%.

The loss posted in the second quarter at €878m was due to an impairment charge in the company’s oil and gas assets, under the Wintershall DEA enterprise, as crude oil prices collapsed during the period.

Impairment charges are those a company makes when its assets are expected to be worth much less than previously. BASF said that there may be  be more imariments to come in the asset portfolio as the downturn caused by the pandemic may reduce demand medium and long term.

“The high levels of uncertainty continue and the low visibility about economic developments makes economic forecasts today difficult. For the third quarter, we don’t expect EBIT [earnings before interest and taxes, or operating profit] to improve significantly due to the generally low demand in August,” said Brudermuller, speaking to reporters from BASF’s headquarters in Ludwigshafen.

“There is a risk that the economic recovery in the medium term will be slower than before the pandemic. Any potential impact is hard to predict. There is a certain risk of having to impair some of our assets.”

TWO-MONTH ORDERS
The impossibility to issue forecasts comes from the company’s customers, who are placing orders only for two months ahead, said the CEO.

Beyond that is the unknown.  Germany’s automotive prowess – the country produces nearly 6m vehicles annually – has been its weakness during a pandemic that hit the sector hard, together with aviation.

BASF sells around 20% of its output to the industry.

However, the way the pandemic is playing out in the US – where prospects for growth in the third quarter are getting slimmer as infection rates climb – could give Germany the chance to accelerate its until now relatively slow progress in developing electric vehicles (EVs), where China and the US are currently leading.

Brudermuller said that although development of EVs in Germany and Europe is still “relatively small”, indicators regarding development of materials for batteries could be showing the catch-up already taking place.

But any sign of progress is constrained by the uncertainty of an autumn which could see Europe’s rates of unemployment rocket as furlough schemes are withdrawn and corporates consider the new normal, lower demand economy.

“Orders were still below [year on year] in the April-July period; the gap is narrowing but whether it will be closed in the third quarter remains to be seen,” said Brudermuller.

“Around 80% of orders will be booked for the next two months; we have no clear visibility [on demand patterns] beyond that.”

BASF had already announced job cuts , in June 2019, when it said 5% of the global workforce would be reduced, or 6,000 positions. That programme has been accelerated this year and is expected to conclude by year-end.

It has also divested construction chemicals and is set to do the same with its pigments division.

CHINA POWERS AHEAD
Brudermuller was enthusiastic about China’s recovery from the first-quarter lows when the coronavirus outbreak hit Wuhan, an industrial and automotive hub.

He was asked whether he believes China’s figures for GDP growth – which in the first quarter showed smaller decreases as a result of lockdowns than those seen in Europe, and in the second showed already a recovery of over 3%. He would not comment on specific figures.

But he said that China’s economic model, centrally planned from the Beijing government, made it easier to prop up the system in times of crisis and, he said, the Asian superpower is the only country in the world posting the V-shaped recovery others expected as the coronavirus first hit.

A V-shaped recovery would mean that, after the sharp downturn caused by lockdowns, reopening the economy would quickly bring back normal conditions.

But the characteristics of the coronavirus, mandating social distancing which is set to affect key small and medium-sized enterprises (SMEs) within the services sectors, has put that prospect far away in most countries – apart from China, according to BASF’s CEO.

“The Chinese system very clearly has the advantage that the government can take decisive action to restart production [mandating companies shifts for production]. The customer confidence index is partially declining, while production is going upwards,” said Brudermuller.

“The months ahead [will show] how production levels and confidence [perform] – I would say the time frame is really early. China has done very impressively and it’s the only country that has a V-shaped recovery so far.

“I think the Chinese government has a better grip than other governments, we can see that. How sustainable is that, we’ll need to see.”

Front page image: Archive image of BASF's annual general meeting in 2019
Source: Ronald Wittek/EPA-EFE/Shutterstock