BASF earnings sag on weak chemicals segment

German chemicals giant BASF SE has reported a 17 percent decline in profit on a 2 percent jump in sales for fiscal 2018.

While income rose to 62.7 billion euroslast year, earnings (EBIT before special items) fell from to €6.4 billion from €7.6 billion in 2017.

BASF attributed the decline primarily to the performance of its chemicals segment, which accounted for around two-thirds of the overall decline in earnings.

Isocyanate margins fell sharply in the second half of the year. Cracker margins in 2018 were also lower than expected in all regions.

“All in all, 2018 was a year marked by difficult global economic and geopolitical developments and burdened by trade conflicts. In the second half of the year, BASF felt an economic slowdown in key markets, especially in the automotive industry, the largest BASF customer industry,” the Ludwigshafen-based chemicals supplier said Feb. 26.

More importantly, BASF noted a ‘significant drop' in demand from Chinese customers, fueled by trade dispute between the United States and China.

"We accept these challenges. With our new corporate strategy, we will use 2019 as a transitional year to emerge strengthened, "said BASF CEO Martin Brudermüller.

Volumes fell at performance products segment, which includes the company's plastics operation. Chemicals' volumes also dropped during last year, due in part to the low water level of the Rhine.

“The exceptionally long low water level of the Rhine has also bothered BASF. The supply of raw materials in Ludwigshafen by ship almost came to a halt over much of the third and fourth quarters,” the company noted.

As a result, BASF had to reduce its capacity utilization in Ludwigshafen. This burdened the result for 2018 with around €250 million.

BASF is continuing its reorganization bid which started at the beginning of the year, in order to simplify processes.

"By the end of the third quarter of 2019, the entire process will be completed. Then around 20,000 colleagues will work closer to our customers,” Brudermüller said.

The change in organization affects areas such as research and development, engineering, supply chain, procurement, human resources, information services, and the environment, health and safety.

Commenting on BASF's recent investments plans in China, Brudermüller said the country was a “key market” in Asia and worldwide, for BASF and the entire chemical industry.

"That's why we have to participate in the growth of China, the largest chemical market in the world," Brudermüller added.

BASF and the Chinese province of Guandong in January signed a framework agreement for the establishment of a $10 billion chemical plant in China.

The company is also expanding in India. It recently signed a memorandum of understanding with Adani to look into a €2 billion joint venture investment in the acrylic value chain at Mundra Harbour in the Indian state of Gujarat.

The project marks BASF's largest investment to date in India and will also be the company's first CO2 -neutral production facility.

For the current year, BASF expects growth of the global economy to be “significantly weaker” at 2.8 percent compared to 3.2 percent in 2018.

The company anticipates domestic and export demand from third countries to grow weaker in the European Union.

By contrast, BASF expects solid growth for the United States. Growth in China will tend to weaken further.

"We also expect our customer industries to continue to grow. For the automotive industry, we expect a slight recovery after the decline in production in the previous year, "said Brudermüller.

In addition, BASF expects the trade policy conflicts between the U.S. and its trading partners to defuse in the course of the year and Brexit to take place “without major economic disruptions.”