BASF navigates low-growth environment as China Verbund spending continues

Tom Brown

22-Feb-2024

LONDON (ICIS)–As BASF prepares to provide more detail on its 2023 financial performance, the Germany-based chemicals major is to navigate the still-chilly waters of 2024 as spending on its flagship China Verbund site in Zhanjiang continues and project pipelines face ever-tougher scrutiny.

The company will release its fourth-quarter and full-year results on 23 February but has been careful to manage expectations, cutting its full-year guidance several times ahead of the end of year reporting date and releasing 2023 performance figures in January.

PERFORMANCE
Revised projections of full-year earnings before interest, taxes (EBIT) and special items of €3.9bn were cut further to €3.81bn, a decline of over 44% year on year, even when comparing against the historically difficult energy price environment of late 2022.

in € millions* 2023 2022 % Change
Group Sales 68,902 87,327 -21.1
EBIT before special items 3,806 6,878 -44.7
EBIT 2,240 6,548 -65.8
Net income 225 -627

According to analyst Konstantin Wiechert at Baader Bank, the revised projections for full-year earnings indicate that conditions may have softened further at the end of the year as, going by previous quarterly results, the company was on track to meet its targets before then.

“According to the company before knowing the December figures it still looked like [EBIT pre-specials] guidance of ~€3.9bn could be achieved, so it is likely one month that really was below expectations,” he said, speaking in January.

SPENDING
The company has set out plans to cut its capital expenditure budget for 2023 to 2027 by €4bn to €24.8bn, with €1bn of the total of the savings expected to have been found last year and the rest in the 2024-27 period.

BASF is expected to announce its 2024-27 capex expectations on Friday, but this year and next are expected to be expensive as the concluding work on its Zhanjiang Verbund site continues.

Interest rates in China did not soar to the levels seen in Europe over the last two years, and the country’s slow rebound after lifting zero-COVID restrictions means that labour costs in the country, which led to favourable pricing for workers, according to CEO Martin Brudermuller.

Nevertheless, work on the Zhanjiang complex means the spending could be robust over the next two years, according to remarks made by Brudermuller on a December investor call.

“You optimize a little bit here and there in these two years of heavy investment coming in 2024 and 2025, but it will not change anything in that we have to finish the whole project as such,” he said. “You cannot build 80% of a Verbund and leave the remaining 20%.”

Brudermuller has hinted that some manoeuvrability on budget may be achieved by a harsher look at BASF’s project pipeline elsewhere.

“We have more projects than money, so that ensures a certain amount of competition,” Brudermuller said in December. “But that is now certainly increasing when we reduce the money available. So, there are more projects, and we look very clearly to see which are the profitable ones, where are some must haves.”

Investors and employees will be watching on Friday for news of any further consolidation in its European asset base.

PROJECT PIPELINE
Another focus for the financial community, given the relative immutability of Zhanjiang spending this year, will be on capex expectations elsewhere, according to Sebastian Bray, a chemicals analyst at Berenberg.

“Management comments around capex and working capital in 2024 may prove influential for the share price movement on the day. I believe capex much in excess of €6 billion or comments that working capital improvements recorded in 2023 are largely ‘finished’ may be taken negatively; the converse also holds, in my view,” he added.

ECONOMY
The start of the year has seen fairly widespread upticks in pricing across European chemicals markets as a result of disruption to global shipping as a result of tensions in the Red Sea that have limited imports and buoyed domestic demand.

The EU in general has become less reliant on imports, with the balance of trade for key products in 2023 firming as a result of the contraction in exports being smaller than the decline in goods volumes flowing into the region.

Nevertheless, markets continue to pin hopes on interest rates and inflation as the key drivers of 2024 prosperity, with central bank rate cuts perceived as crucial to allowing a more pronounced recovery to develop.

Expectations remain that substantial cuts to rates may only be introduced in the second half of the year, meaning that investor sentiment remains bearish.

“I think the swing factor on [BASF] results will be cash flow as much as earnings outlook, where the market has settled into a consensus of a grinding, H2-weighted recovery. 2024 will be a year of high capex for BASF, which may temporarily necessitate funding the dividend out of reserves or divestment proceeds,” he said.

According to Brudermuller, the European chemicals industry has lost 25% of its volumes since the onset of the Russia-Ukraine war, with some of that due to energy pricing and cheaper product elsewhere, and part due to lower orders due to customers’ own woes.

“I would expect that capacities are lost for good in the European chemical industry.,” Brudermuller said in January.

…The industry is still lagging a bit behind reality. I would expect that we will see some movement in the industry in 2024,” he added.

Conditions in Europe are gradually thawing, with optimism ticking up, the general trend continuing toward inflation cooling in spite of the impact of the Red Sea crisis, and eurozone private sector activity drawing closer to stabilising.

With little signs of a substantial rebound in underlying demand conditions, the first half of the year may remain difficult for the sector, prompting strict discipline on spending.

“Without giving guidance now, we have said that the start to 2024 will not be easy. I think that the closer we get to 2024, the more likely it looks that 2024 will be another difficult year,” Brudermuller said.

Focus article by Tom Brown

Thumbnail image shows flags flying at BASF headquarters, Ludwigshafen, Germany (picture credit: RONALD WITTEK/EPA-EFE/Shutterstock)

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