More of the same

British chemical major ICI used to be regarded as a bellwether for the UK economy. If ICI was going well, this meant the UK economy was looking good. Germany’s BASF has been seen by many as a similar bellwether – if not entirely for the European economy, then certainly for the European chemical industry.

Germany has the third largest chemical sector globally, with sales in 2015 of €147.7bn, according to the European Chemical Industry Council (Cefic). So if BASF’s 2016 financial results are anything to go by, the European chemical industry saw some growth, as the company’s sales have grown during

2016, with Q4 2016 sales at €14.8bn beating Q4 2015 by 7%. For the year 2016 as a whole, sales fell 18%, compared with 2015, to €57.6bn. But as chairman Kurt Bock pointed out, this does not tell the whole story as sales increased through the year.

Belgium’s Solvay also reported its 2016 results on the same day as BASF, and also saw sales fall for the year as a whole, down 4.7% to €10.9bn. But again net sales in Q4 were up 1.6%, at €2.8bn, due mainly to a 3.9% increase in volume – partly offset by a 2.2% reduction in sales prices.

BASF’s earnings before interest and tax (EBIT) before special items in the final quarter were 15% higher than in 2015; however, for the full year 2016 the figure of €6.3bn was 6% lower, or €430m less, than 2015. Bock attributed this to the decline in the company’s oil and gas business, falling prices and the divestiture of its natural gas trading and storage activities to Gazprom.

As expected, growth of the global economy and the chemical industry slowed in 2016, compared with the previous year,’ Bock said. However, ‘global industrial production grew at the same level as in 2015. Our main customer industries performed on average, better than industrial production; positive impacts came from the automotive industry.’

Bock highlighted some of the issues that affected performance. ‘Political uncertainties also accompanied us in the past year and influenced our customers’ behaviours. The British voted to leave the EU, geopolitical conflicts escalated and in the US, uncertainty increased with the election of the new president,’ he noted.

He also spoke about the accident in October 2015 during maintenance on a pipeline in the North Harbour of BASF HQ in Ludwigshafen, which resulted in the deaths of four people and left others with injuries so severe they have yet to return to work. Bock noted that the BASF team ‘worked hard to quickly implement solutions to the initial major disturbances to the logistics supplying the site’, adding that the economic consequences had been ‘considerably smaller’ than expected in the immediate aftermath of the accident.

Looking to the future, Bock said that BASF is cautiously optimistic for 2017, and he expects group sales to grow considerably, ‘more than 5%’. ‘This will be supported by slightly higher sales in the performance products segment and by considerable increases in the other segments.’  

These increases will be supported by the investments that have been made in prior years. As Bock pointed out, BASF has recently increased investments in new plants worldwide. ‘We have thus created the conditions to enable further profitable growth,’ he said, adding, however, that these investments were scaled back in 2016 by more than €1bn, although a total of €3.9bn was still invested in capital expenditures, excluding additions to property, plant and equipment related to acquisitions and IT investments.

China saw the start-up of plants in Korla and Shanghai during 2016, and production of citral and L-menthol will begin during 2017 in the BASF Verbund site in Kuantan, Malaysia. ‘We are now filling the existing capacity in our new plants and thus building on the volume momentum seen last year,’ he emphasised.

Currently in Texas, US, BASF is building a worldscale ammonia plant in Freeport together with fertiliser producer Yara, and herbicide capacities are being expanded at the Beaumont site. MDI production is also being expanded at the Verbund site in Geismar, Louisiana, US. Meanwhile in Ludwigshafen, BASF is planning to replace the existing acetylene plant by 2019.

In terms of R&D, BASF spent €1.86bn during 2016. For 2017. Bock said that there will be a slight increase over this figure in 2017. 

Outside BASF, Bock believes continuing political uncertainties mean that volatility will remain high, and that there will be a considerable slowdown in growth in the EU, compared with a slight upturn in the US. Growth in China is likely to continue to slow further, he added, although the company expects the recession in Brazil and Russia to end. Overall, Bock expects global economic growth to remain the same as in 2016 at 2.3%, and similarly growth in global chemical production, excluding pharmaceuticals, will remain static at 3.4%. BASF’s predictions are based on an average euro/dollar exchange rate of $1.05/euro, compared with $1.11/euro in 2016, and an average Brent oil price of $55/barrel, compared with $44/barrel in 2016.