Frankfurt, Dusseldorf The chemical group BASF wants to react to the high energy costs and falling margins with an extensive savings program. In addition to the savings of 500 million euros in areas outside of production announced in the autumn, the group is now also planning cuts in the production facilities themselves.
According to information from the Handelsblatt, it is certain that the BASF board of directors will announce the closure of part of its ammonia production in Ludwigshafen at the balance sheet press conference on Friday.
BASF currently operates two ammonia plants in Ludwigshafen, which were temporarily shut down last year. Due to the extremely high gas prices, they were no longer profitable to operate. According to information from company circles, the group does not want to put the older of the two systems back into operation.
BASF operates another ammonia plant at the Antwerp site. The production of the chemical raw material has a long tradition at BASF. The development of ammonia synthesis at the beginning of the last century was one of BASF’s great pioneering achievements. However, the production is particularly energy-intensive. About 80 percent of production costs are spent on energy, especially natural gas.
On the other hand, the basic chemical is relatively easy to transport, so that the demand in Ludwigshafen can also be well covered from other production sites and through purchases on the world market.
BASF boss Martin Brudermüller had already announced last fall that there would also be adjustments in production. In the case of basic products in particular, the question arises as to whether they can still be manufactured competitively in Europe and Germany in the long term, said Brudermüller in an interview with the Handelsblatt.
BASF boss Martin had already announced that there would be adjustments in production.
(Photo: BASF SE)
Experts assume that the chemical company could also cut production of acetylene, which is also heavily based on natural gas, or products such as the fuel additive Adblue, which is made from ammonia.
Some analysts also see BASF’s problematic factory for the plastics precursor TDI as a potential candidate for closure. The plant in Ludwigshafen, which cost around one billion euros, was only put into full operation in 2018 after many delays and has apparently been struggling with further technical problems since then, which may have caused additional investments of several hundred million euros in addition to the original investment volume.
Because the company’s competitiveness has deteriorated due to the high energy costs, the idea goes, the group could give up the plant completely – which, however, would require additional value adjustments in the billions.
When asked about the possible closures in production, BASF did not want to comment. There is no comment on rumors and speculation, a spokesman said.
Overall, the adjustment in the production area is likely to be more moderate than many experts feared last year. The reason for this is, on the one hand, the energy prices, which have fallen significantly again in the meantime, especially for natural gas.
On the other hand, analysts assume that the group also wants to retain a certain amount of maneuvering power and threats so that it can continue to put pressure on politicians in the direction of a cheaper energy supply. “One will have to wait and see how the EU and the federal government, for example, will react to the US government’s Inflation Reduction Act,” says chemical expert Markus Mayer from Baader Bank.
Workers fear severe repercussions
From the point of view of the employees, the planned savings in the other areas of the group are more painful and apparently also more controversial than the possible adjustments in production. The BASF board of directors is also likely to present detailed plans for this at the balance sheet press conference on Friday.
Measured against the average personnel expenses per capita at BASF, the savings program of 500 million euros could result in the loss of up to 5,000 jobs. The largest share of this is likely to be attributable to the Ludwigshafen plant, where the group still employs around 39,000 people – around a third of the global workforce. The location with more than 200 closely networked chemical plants is also the administration, sales and research center of the group.
The group employs around a third of its workforce at its headquarters.
(Photo: BASF)
The works council and the IGBCE trade union expect “strong effects on the Ludwigshafen site” and, in a rather unusual step for BASF, have invited to a separate press conference on Friday to explain their strategy.
In view of the weak performance of the share price in recent years, declining operating income and recently announced high write-downs on the Russian activities of the energy subsidiary Wintershall Dea, the pressure on BASF management from investors is growing. They demand perspectives on how earning power can be increased again in the longer term.
>> Also read: Wintershall’s withdrawal from Russia rips a billion-dollar gap in BASF’s finances
The group closed 2022 with a net loss of almost 1.4 billion euros, mainly due to an impairment of 7.3 billion euros on the majority stake in the oil and gas producer Wintershall Dea.
Adjusted operating profit (EBIT) in 2022 was only eleven percent below the previous year’s figure at 6.88 billion euros. However, the operating earning power obviously deteriorated sharply in the second half of the year. In the fourth quarter alone, operating profit is likely to have fallen to only around 370 million euros, compared to 1.2 billion euros a year earlier.
Overcapacity in basic chemicals
Weak operational development is also becoming apparent for the current year, mainly due to further declining margins in the basic chemicals and plastics business. Chemical expert Mayer therefore expects a relatively negative annual outlook for BASF management.
He points to global overcapacity in the petrochemical industry, which is increasing the pressure on margins. “It will stay that way for a long time to come, because more capacities are coming onto the market in the Middle East, in America and also in China.” the previous dividend policy of the group could be called into question.
With a view to investors and the stock market valuation, it will therefore be important for the Board of Executive Directors of BASF to show how this phase of weakness can be overcome in the long term. It is crucial that the planned cost-cutting measures really go beyond the routine efficiency programs, says Arne Rautenberg, fund manager at Union Investment. “We expect the BASF board to present a program that is far-sighted and shows what the long-term plan for the company is.”
Traditionally, BASF is relatively strong in doing business with large-volume chemical products. “But so far, Brudermüller has not been able to prove that specialty chemicals can also become more profitable and effective,” says Rautenberg.
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