Frankfurt Measured against the panicky mood on the capital markets due to the corona virus, the numbers and forecasts of chemical giant BASF have a calming effect. After an almost 30 percent drop in operating profit last year, the Ludwigshafen-based group is forecasting an approximately stable operating profit and moderate sales growth for 2020.
A negative corona effect has already been factored in for the first half of the year – albeit not a global spread of the corona virus, as is currently assumed by the markets.
After the figures have been presented, it is clear that the business of the world’s leading chemical company will continue to develop disappointingly, contrary to the original expectations. After the “transition year” 2019 – according to the plan – the group should actually return to a profitable growth course in the current year.
Instead, the long stagnation phase is apparently continuing for now. Overall, profitability and cash flow are still solid, but ultimately they are at a level that was achieved ten years ago. BASF shareholders must continue to wait for a new profit dynamic. In this respect, the new strategy of company boss Martin Brudermüller is put to a much tougher test than expected.
The virus from the Middle Kingdom is an important, if not the only, braking factor. In response to the Corona crisis, BASF management has so far reduced its growth assumptions for the global economy and chemical demand by around 0.6 percentage points compared to the original expectations. According to the BASF calculation, China will only grow by 4.5 percent instead of six percent as a result of the corona epidemic.
Brudermüller does not see the country’s long-term prospects in question, nor does BASF’s strategy. “If you want to grow on the world market, you have to participate in the growth of China,” is his motto. Nothing will change in the Group’s massive investment plans in China either.
By 2030, $ 10 billion is expected to flow into a new large chemical complex in Guangdong Province. The focus of investment will thus shift to Asia in the next five years. BASF plans to make around 41 percent of the planned total investment of around 24 billion euros in Asia, and only 34 percent in Europe.
Several stress factors
In addition to the corona effect, the second factor is the difficult situation in the plastics and basic chemicals business. The segments, which have long been highly profitable, are currently characterized by considerable overcapacity and a decline in margins. And apparently little will change for the time being, as the explanations by the BASF chief made clear at the press conference on the balance sheet. For 2020, too, the group calculates with significant losses.
The exciting question will be to what extent the business with higher-quality and consumer-oriented chemical products can compensate for this deficit. Basically, BASF is the world’s broadest provider in this area, but has so far struggled with a few weak returns in this “downstream” business.
After all, thanks to a relatively tough austerity program, internal reorganization and the streamlining of the product range, a positive trend is now emerging. In the past year, the specialty chemicals divisions significantly improved their operating profit by a quarter for the first time in a long time.
The Group expects further progress in 2020. In addition, the share of the highly profitable agrochemical business grew noticeably after the acquisition of seed and crop protection activities from Bayer. Structurally, the BASF Group appears to be in better shape. But to translate that into effectively increasing profits, the chemical giant still needs the tailwind of the economy.
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