BASF expects bumper Q2 but easing of lockdowns may change consumer habits in H2

Author: Jonathan Lopez

2021/04/29

LONDON (ICIS)--BASF expects its bumper Q1 to continue into Q2 as global inventories for many chemicals are low and demand remains high, the CEO and CFO at the German chemicals major said on Thursday.

Vaccination programmes in North America and Europe could cause the easing of lockdown measures and potentially change consumer habits from home-focused expenditure to other purchases such as travel, in turn denting demand for petrochemicals used in production of goods, they added.

BASF said earlier on Thursday its net income had nearly doubled during Q1 and earnings were up nearly 60%, year on year, as manufacturing activity across the world continues its healthy run.

The overall growth in all regions was even more pronounced in China, said BASF, where double-digit growth in sales has continued since the second quarter of 2020, as the country emerged from lockdown earlier than other major economies.

MORE FREEDOM, FEWER PETCHEMS NEEDED
Petrochemicals have benefited from lockdowns as consumers confined to their homes have spent more on goods, rather than experiences.

BASF’s CEO Martin Brudermuller said the current healthy run in the industry should not “get us carried away” thinking it will last well into the second half of this year.

Several major economies in the EU have been slower than the US and the UK to roll out vaccinations against COVID-19, and lockdown measures remain in Germany, France, Italy, or Spain, the four largest economies within the EU.

But vaccine roll-outs have started to pick up speed from April, and that could prompt a relaxation of measures and consumers, avid to get out and about, may quickly change their purchasing habits, said CFO Hans-Ulrich Engel.

“It looks to us that inventory levels across various chemicals continue to be relatively low, and demand continues to be so strong – also created by stimulus programmes – that there has been no time to build inventories,” said Engel.

“Due to high prices [across many petrochemicals markets], customers have also been careful placing orders.”

Both Engel and Brudermuller wanted to bring down expectations as record high levels of manufacturing activity are likely to fall as consumers get out and about more.

The services sectors across the world have been battered by the pandemic, as they are the most consumer-facing industries with the most restrictions.

“During lockdowns, consumers purchased certain things for the house but, when they have freedom to move, it might be that more disposable income is used in other things than goods,” said Brudermuller.

“We are not negative about that, but the dynamics may change in the second half of the year, hence our wide range in earnings expectations [for 2021],” said the CEO.

BASF updated on Thursday its forecast for the year - sales are expected now at €68-71bn, up from the previous projection of €61-64bn, and earnings before interest and taxes (EBIT, or operating income) is expected at €5.0-5.8bn (previously at €4.1-5.0bn).

Engel added: “We are in a situation where downstream divisions have pricing power, but whether they will be able to pass on the raw materials prices increases we have seen in Q1, if they continue, remains to be seen."

SEMICONDUCTORS ENIGMA
The key automotive industry – to which BASF sells around 20% of its output – remains a mystery right now, said Brudermuller, as strong demand continues to face a “structural problem” in the global supply chain for semiconductors, used to produce chips increasingly important for electric vehicles (EVs) production.

“There are expectations that the semiconductor issue could normalise in Q2, but it could also be a longer one – we don’t know how production levels will be in the second half of this year,” said Brudermuller.

Brudermuller and Engel were speaking to financial analysts from BASF’s headquarters in Ludwigshafen, Germany.

Front page picture: BASF's Ludwigshafen facilities 
Source: Ronald Wittek/EPA-EFE/Shutterstock