INSIGHT: BASF’s additional fixed and variable cost reductions in Ludwigshafen reflect Germany’s challenges
Nigel Davis
23-Feb-2024
LONDON (ICIS)–BASF has suffered in Germany and across Europe from energy high costs and poor demand that continue to drive structural change.
Much weakened competitiveness is forcing the company to tackle the situation at the upstream businesses by adapting production capacities to market needs. But plants not operating at 80-90% because of weak demand are a drag on profitability and something has to be done to sustain the operations at Ludwigshafen and maintain the cost-effective Verbund structure on which the company relies.
“We have to say goodbye to the good old times in Germany,” BASF CEO Martin Brudermuller said on Friday on release of the company’s fourth quarter and full year 2023 financial results.
Weak demand is on-going, although BASF believes that chemicals production globally will 2.7% this year compared with a tough 1.7% increase in 2023.
Most growth, however, is expected to come in China. The company’s European operations are under significant pressure, and BASF is feeling the impact in its Chemicals and Materials segments where it has major production capabilities.
Chemicals segment earnings (before interest, tax and special items) last year were down 82% at just €361m. Materials segment earnings were down 55% at €826m. Chemicals includes the building block petrochemicals while Materials includes engineering plastics and polyurethanes, among other systems, and their monomers.
Gas costs in Europe are still twice what they were and four to five times higher than those in the US. Global supply and demand imbalances for major upstream chemicals are damaging structurally as well as in the short term and BASF has to adapt its giant Ludwigshafen production complex to the new realties. There will be plant shutdowns, Brudermuller said on Friday.
Ludwigshafen is so big that it is impossible to imagine BASF without it, or at least to imagine a significantly changed production footprint. Nevertheless, against the backdrop of Germany and Europe’s challenged industrial position and an uncertain industrial manufacturing future the way it is transformed over the next few years will reflect the new realities.
The complex has lost money recently – although it does bear the costs of the BASF global HQ amongst its overheads. Most of the company’s employees work there.
A new cost reduction programme reduction of €1bn, adds to previous recent plans to address high costs. Plants and jobs will be impacted. New technology will be applied, and the company talks about tackling fixed costs and significantly trimming variable costs. “The situation is serious, so we are explicitly not ruling out any measures,” Brudermuller said.
Taking carbon reduction plans into account also, the range of chemicals produced at Ludwigshafen is expected to change. The company has to factor into its plans the costs of decarbonisation of assets, some of which are many decades old.
Its CFO, Dirk Elvermann said on Friday that the new reality will have an impact on manufacturing industry in Germany. BASF has to change its approach, he added, and adjust the type and dimensions of upstream and downstream assets. There will be a push towards the downstream, more downsizing and materials will be sourced from elsewhere, he indicated.
BASF expects global economic weakness to continue this year with chemicals demand, impacted by high interest rates, rising only slowly in moderately growing customer industries. China growth is somewhat stronger, but uncertain. The company does not expect much from Europe while it foresees a slight slowdown in growth in the US.
“We can’t do magic here,” Brudermüller said on Friday. That is possibly a phrase that applies to the company’s asset footprint in Germany as much as market conditions.
Insight by Nigel Davis
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