BASF calls for pragmatism on EU green plans as Q4 profits surge

Author: Jonathan Lopez

2021/02/26

LONDON (ICIS)--BASF performed better than its own forecasts had predicted in 2020, resisting the economic onslaught brought about by the pandemic, on the back of healthy operations in China and robust Q4 demand in other regions, the CEO of the German chemicals major said on Friday.

Martin Brudermuller, who is also the president at Europe-wide chemicals trade group Cefic, noted that BASF is paying great attention to the EU’s proposed new chemicals regulations and the Green Deal that aims to decarbonise the economy.

The EU must change its industrial policy but exercise care in not harming the competitiveness of the chemicals sector, he said, or risk what the industry calls ‘carbon leakage’: producers leaving Europe to set up operations in other jurisdictions with less stringent regulations.

BASF is committed to carbon neutrality, he said, and that is why its focus on battery production – key for transport electrification – will continue unabated.

Batteries and its large-scale chemicals complex in Guangdong, China, will be the focus on capital expenditure (capex) going forward, said the CEO, speaking to reporters from BASF’s headquarters in Ludwigshafen, Germany.

2020: FEWER SCARS THAN TOUGHT
BASF published earlier on Friday its fourth-quarter and full-year 2020 financial results, surprising on the upside after a strong three months in most regions it operates.

Earnings and net income fell sharply for the year, but in the fourth quarter they managed to recover ground as sales volumes rose 7% year on year, with selling prices also increasing 7%.

Moreover, the company is confident that the recover is well underway, and said it expects sales for 2021 between €61-64bn, up from €59.15bn in 2021.

China’s Guangdong project will continue taking the bulk of capex; the company plans to spend €22.9bn in the 2021-2025 period, with 41% of it spent in the Asia-Pacific region, and 39% in Europe.

Opposite to the dividend cut chemicals equity analysts were expecting, BASF surprised on Friday by proposing a €3.30/share dividend, although that did not stop investors selling BASF's stock, falling by 1.3% by 12:30 GMT, compared to Thursday's close.

Brudermuller said the automotive industry – to which the European petrochemicals industry sells around 20% of its output – is set to strongly recover this year, after it was, together with aviation, the most battered industry in 2020: sales fell nearly 25%, year on year, according to the European automotive trade group ACEA.

The recovery there would go parallel to that in China, which managed to weather the storm caused by the pandemic much better than other major economies.

In July 2020, when Europe was only emerging from the shock of lockdowns, Brudermuller said the Chinese economy had the advantage of being a planned system, implying the government decides when and how to prop up industries, so employment is preserved.

On Friday, he was asked if that is still the case, and if that sort of growth is sustainable in the long term.

“What we could see in recent months – January and February – is that growth has become fairly sustainable, not only industrial growth but also sentiment among consumers,” said Brudermuller.

“The other part we should consider is the political tensions with the US [in past years], which made China to focus much more on the domestic market.”

He went on to say that the economic development of China is guaranteed for decades to come given that “they are so far away” from western economies in terms of GDP per capita, meaning it will be domestic factors those that make the economy run.

“The domestic market will fuel the Chinese economy for a long time. I am confident in the Chinese market; I lived there for 10 years, it is fairly sound and [BASF always had] double-digit growth.”

EU: NEW CHEMICALS LAWS NEXT
While Chinese politics leave little room for debate, the EU is a different beast altogether, with 27 national views on what industry should look like.

Brudermuller said at the press briefing he wanted to “talk politics” by explaining that what BASF is doing in the carbon management field is aligned with the EU’s Green Deal.

BASF’s own record, he conceded, failed to achieve a reduction in emissions during 2020 as efforts in some divisions were offset by the highly polluting polyamide (PA, also known as nylon) business it acquired from Solvay last year.

In fact, 2020’s emissions stood at 20.8m tonnes of carbon dioxide (CO2) equivalents, due to that integration, up from 2019 (20.1m tonnes) but lower than in 2018 (21.9m tonnes).

What BASF is doing regarding emissions was the carrot in Brudermuller’s message; the stick came as a warning that if the EU decides to go deeper into stricter regulations for the industry, it would be putting at risk the competitiveness of what he described as the fourth largest industrial sector in the 27-country bloc.

“As part of the Green Deal, the EU wants a new chemicals strategy. We have concerns on the part the Commission wants to play,” said Brudermuller, adding that the industry wants to enter “a constructive dialogue” on how to achieve safety of chemicals without putting the industry at risk.

He went on to say that “dreams and ambitions” need to be adapted to reality, so competitiveness is not damaged, which continues exposing the always-present dichotomy between what the intentions in terms of reduction of emission are, and how far the industry can or wants to go.

By 2050, the EU wants to be carbon neutral, meaning the current fossil fuels-based industrial base would disappear, powering its activities with renewable energy sources; chemicals electricity consumption makes the industry a net polluter.

Brudermuller said the target of net-zero emissions is laudable but without collaboration from industry, it will not be achieved.

“There is no question the Green Deal is a very ambitious programme for our continent, and no question the chemicals industry is affected by this. This transformation has to work for industry to maintain competitiveness internationally – otherwise this won’t work,” he said.

“We have to bring down the dreams and ambitions [to reality], focusing on innovation, technological development. Chemicals sales in the EU are at €500bn, we are a net exporter of chemicals and have for years run a trade surplus,” he added, arguing chemicals is key for Europe to keep a strong industrial base.

He mentioned how carbon dioxide (CO2) emissions “will be more expensive” in years to come; currently, net polluters pay for emissions rights under the Emissions Trading System (ETS), whereas many services-based companies pay no rights, but as part of the wider economy they also pollute.

In a previous interview with ICIS, Cefic’s director general said they would campaign for those non-industrial players to share the burden of CO2 emissions cost.

TEXAS: ONE-OFF FREEZE
Brudermuller and BASF’s CFO Hans-Ulrich Engel said the historic freezing temperatures in Texas, US which brought havoc to production and logistics in the key petrochemicals hub of the Gulf Coast was likely to be a one-off event.

Engel came to say that it would not be wise from a business perspective to adapt the plants in the area to cold temperatures like the ones registered earlier in February.

Asked about the state of BASF’s plants and about allegations of poor management of power lines in the state of Texas, the two executives did not answer but spoke more generally about how the chaos brought by the freeze had been dealt with in a matter of weeks, arguing the response had been adequate.

“In the end, these sites are used to deal with high temperatures, with high humidity, but they are not prepared for very low temperatures,” said Engel.

“Making the investments to make these sites freeze-proof is not an appropriate cost [for a company].”

Front line picture: A storage tank at BASF's flagship site in Ludwigshafen, Germany
Source: Ronald Wittek/EPA-EFE/Shutterstock