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BASF President Martin Brodermüller wants to reduce costs in Europe and especially in Germany as quickly as possible. “On the one hand, the European chemicals market has only been growing slowly for about a decade,” Brudermüller said Wednesday in Ludwigshafen, and on the other hand, a sharp increase in natural gas and electricity prices has put chemical value chains under stress, explaining the austerity program that It was launched recently. In the first nine months of the year, additional costs for natural gas at BASF’s European sites were around €2.2 billion compared to the same period last year.
“In order to mitigate these additional costs, we have implemented further price increases,” Brudermüller explained on the conference call. In addition, BASF continues to work on projects to technically improve plants and processes, particularly at the largest Verbund site in Ludwigshafen. Lower utility utilization in the third quarter helped limit the impact of higher natural gas prices.
In the short term, Brüdermueller said, cost savings can mainly be achieved through fewer business trips. Today, a business class ticket to Asia is almost the same as a first class ticket. Savings can also be achieved through fewer advisory activities. Services should be limited to the essentials. Thanks to these actions, costs can be reduced already in the fourth quarter.
However, even in a strong 2021, Europe including Germany contributed only a third of the result, says Brudermüller. During 2022, the earnings situation continued to weaken, with the German business in particular deteriorating. In the third quarter, BASF reported negative EBITDA of €130 million in Germany.
Due to deteriorating business and more difficult framework conditions in Europe, BASF management recently launched an austerity program that is scheduled to be implemented between 2023 and 2024. The cuts are expected to reduce annual non-production costs by €500 million. The Executive Board wants more than half of the savings to be made at the Ludwigshafen site, where BASF employs some 39,000 of its approximately 111,000 employees worldwide. She said the company, service and research areas as well as the company’s headquarters will be streamlined. The company does not rule out laying off jobs.
“We are currently developing further structural measures to adapt the BASF production network in Europe to changing frame conditions in the medium and long term,” explained Brudermüller. Thus, the company is working to secure its future competitiveness and will significantly reduce its consumption of natural gas. BASF is making “great progress”. Details are expected to be available in the first quarter of 2023.
Despite the public debate about the consequences of possible dependence on China, Brudermüller sticks to his plans for China. “We have a very profitable Chinese business,” said the company manager. BASF still sees great opportunities for BASF in general conditions. Therefore, the company will continue its involvement with China as planned. BASF is building a new Verbund site in the Chinese province of Guangdong, where BASF intends to invest ten billion euros by 2030. After Ludwigshafen and Antwerp, Zhanjiang will be the third largest site for the Dax Group and already the second in China. According to his own statements, Brudermüller will be part of Chancellor Olaf Schultz’s tour group when he visits China at the beginning of November.
Meanwhile, the group has already presented key data for the third quarter in mid-October. Thanks to higher prices and favorable exchange rates, BASF was able to increase sales by 12 percent year-on-year to nearly 22 billion euros in the three months. However, the operating result – earnings before interest, taxes and special items – fell 28 percent to 1.35 billion euros. CFO Hans-Ulrich Engel said the overall decline was due to significantly lower contributions from the basic chemicals and plastics (materials) sectors. And in the third quarter, operating profits in these two sectors fell from 1.5 billion euros in the previous year to 600 million euros.
Profit after tax fell from €1.25 billion to €909 million due to value adjustments to the majority stake in the oil and gas group Wintershall Dea. Those declines are the result of a partial writedown of Wintershall Dea’s stake in Nord Stream AG, which operates the Nord Stream 1 pipeline. Gas has not flowed through the pipeline from Russia to Germany for weeks. Recently there have been many leaks in the line. Previously, Russian President Vladimir Putin had already used pipeline gas supplies as leverage against EU sanctions as a result of Russia’s war of aggression against Ukraine.
With the economy significantly weaker in the third quarter, BASF has revised its assessment of the global economic environment in 2022. However, BASF has reaffirmed its annual targets. For the current year, the group continues to expect an increase in sales to between 86 and 89 billion euros, after 78.6 billion euros in 2021. The company aims to achieve 6.8 to 7.2 billion euros in operating profit. In 2021, BASF reported earnings before interest and tax (EBIT) adjusted for special effects of $7.8 billion.
BASF wants to cut jobs
In the planned measures to reduce annual costs in Germany and Europe by 500 million euros, ASF will also add one Reducing Don’t wander. This was confirmed by CEO Martin Brodermueller, who did not want to comment on the potential size of such job cuts at the press conference to provide the quarterly numbers. “It’s still too early to say anything about that,” Brudermueller said.
Half of the savings announced weeks ago will be applied to the Ludwigshafen site and will not affect production, but management, service and research and development. The company’s headquarters will also be streamlined. Since personnel costs are high in these areas, one can easily imagine that this would mean job cuts, he says.
Brudermüller, who will remain at the helm of the group until May 2024, wants to “implement” all individual measures by the end of the following year. As the development of business in Europe and especially in Germany worsens, the manager speeds up his pace. Brudermüller argues that structurally weaker growth, higher gas prices — six times higher than currently in the US — and increased EU regulation threaten the international competitiveness of domestic producers.
BASF should “adjust cost structures as soon as possible and also permanently”. Just seven years ago, Germany and Europe would have contributed about two-thirds to the group’s EBIT-adjusted earnings, and in a “strong 2021” it was only one-third, and the earnings situation continued to deteriorate. In the third quarter, BASF reported a loss in EBITDA of €130 million in the domestic market alone.
In addition, BASF is studying how the production network in Europe can be adapted to changing frame conditions in the medium and long term by means of structural measures. Brudermüller plans to provide details by the end of March 2023. “We’re making great progress,” said the CEO.
Meanwhile, it has not been decided whether BASF will benefit from state aid due to high gas prices. Determining where and if the group needs help can only be determined after the exact details have been worked out. “BASF will do its best to manage this on its own,” Brudermüller said.
At times, BASF shares fell 1.25 percent to 45.37 euros in XETRA trading after previously being in the black.
LUDWIGSHAFEN (awp international) / Dow Jones Newswires