The global economic slowdown will continue affecting chemicals in coming months as there was no “impulse for improvement” in the third quarter, while the US-China trade war and Brexit keeps denting confidence, the CEO of German chemicals major BASF said on Thursday.
The company, which acts as a bellwether for European chemicals, published earlier on Thursday third-quarter financial results. As expected by chemicals equity analysts, earnings fell sharply during the period.
However, BASF’s stock was up nearly 2% by 12:00 London time as the bad news had already been discounted after the company lowered its guidance in July and hinted at “more pain” ahead.
The company’s CEO, Martin Brudermuller, also said that the US economy, which had help up reasonably well so far, is also entering an industrial downturn that will only add to the woes.
“The political conditions will remain challenging … The trade conflict is weighing on our business, and, together with Brexit, is acting as a drag on the economy. The US is also experiencing a slowdown,” said Brudermuller.
“A forecast [for 2020 is] extremely difficult at the moment. In the third quarter, we didn’t see any impulse for improvement.”
Demand in key end markets like automobile remained poor during the July-September quarter, affecting the company’s chemicals selling prices, which fell 4%.
“Capacity utilisation rates have dropped below 80% significantly, [and that has also been] reflected in our portfolio … Simply, demand is weak so you have to run your big engines accordingly,” said the company’s CFO Hans-Ulrich Engel.
ISOCYANATES: STABLE, BUT LOW
Isocyanates prices declined “considerably”, said Brudermuller, speaking to reporters at a press conference in Ludwigshafen.
BASF’s CFO went on to say that the sharp fall in isocyanates prices over the last two years was showing signs of stabilisation, but warned that the company’s upcoming plant in China for production of toluene di-isocyanate (TDI) could add to the global supply and keep prices low.
TDI is a good indicator of economic activity – the isocyanate goes to end markets like polyurethane (PU) flexible foams used in upholstery, mattresses and automotive seats.
“Right now, prices for TDI are stabilising, but we have to keep in mind we are ramping up a world-scale plant in China [which may] put pressure on margins and prices,” said CFO.
“Prices are stabilising on a very low level,” he added.
The company started up in 2018 another TDI plant at its German flagship site of Ludwigshafen, with production capacity of 300,000 tonnes/year.
The plant, currently under maintenance, may take several quarters to raise its capacity utilisation, said the CFO.
“Plant utilisation with respect to TDI is obviously reflecting what’s happening in the industry,” said Engel.
BASF said on Thursday that it is still in talks with a “small number of bidders” over the sale of its construction chemicals business, which is planned for the current quarter.
COST-CUTTING PROGRAMME
The company announced in June it was to cut 6,000 jobs globally. Earlier this week, it also announced that as part of its cost-cutting programme it was reducing the size of the board from seven to six members.
According to the executives, by the end of 2019 around 1,800 job terminations will have been completed, around 1,100 of them in Ludwigshafen.
BASF said its project to create a Verbund site in China’s Guandong remains on track. The company announced the $10bn project in 2018.
Moreover, the CEO said that the site’s construction and operations forecasts are not being affected by the US-China trade war because the project is one that “will grow over several decades”, adding that the project is “high on the agenda” for both China and Germany’s governments.
“We are discussing with all kinds of corporations, we need investment, we need support from Chinese and German companies. Thank God this project is being not affected by current developments [with the trade war],” said CFO Engel.
BASF operations in the US have so far been “remarkably stable”, said the CEO, but the trade war is also expected to take a toll in the country’s economy in the medium and long term.
“In the short term, China’s economy has been more affected, but a longer projection [shows a] more severe impact in the US. The PMI manufacturing index is depressed for the fourth quarter,” said Brudermuller.
PLASTICS BACKLASH: BASF SPARE
Engel highlighted how BASF had divested its plastics packaging businesses – mostly produced with polyethylene (PE) and polypropylene (PP) – more than 20 years ago, and argued the company could be freed from the social backlash against plastics.
“The debate about plastic is global and very emotional, and this is why we have the Alliance to End Plastic Waste [AEPW], of which we an active part. Together with other companies, many questions can be solved better,” said Engel.
“The essential discussion is not about raw materials [to produce plastics] only: the current discussions don’t relate to consumer goods as much [end markets for BASF]. This can, on the other hand, be an opportunity.”
CO2 PRICE: ‘INTENSE’ TALKS WITH POLITICIANS
Germany has approved a carbon dioxide (CO2) price, effective in 2021, although BASF’s CEO said that the company is intending to establish “intense discussions with politicians” to fine tune the environmental package.
“Chemicals wants to switch from fossil fuels to electricity for its energy consumption, and for this to be successful we need a regulatory environment that makes allows for affordable electricity. Otherwise, this [green policies] won’t succeed for cost reasons,” said Brudermuller.
“We will have intense discussions with all parties. The chemicals industry will contribute, but we need the German government and the EU Commission [the EU’s executive body] to keep in mind we need to have a levelled playing field.”
By Jonathan Lopez
Source: ICIS News
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