BASF preparing for tougher trading environment

Ludwigshafen, Germany – Chemicals group  BASF SE has posted solid third quarter results as its operating divisions all  increased prices and volumes rose in almost all segments. Overall, sales rose by 13 percent to €15.8 billion. BASF also increased earnings in its operating segments by 7 percent – despite further increases in raw material costs, declining demand from important customer industries and the hurricanes on the US Gulf Coast, which alone reduced earnings by more than $100 million.

Income from operations (EBIT) before special items of BASF Group declined by 8 percent, in particular due to significantly lower earnings in Other. Here, significant expenses from hedging naphtha purchases against increasing prices were incurred as a result of the fall in oil prices toward the end of the quarter.

Chairman Dr. Jürgen Hambrecht stated: "The impact of the global financial crisis on the real economy is speeding up and hitting harder. The economic skid marks can no longer be ignored. The decline in demand in important markets, stockpiling by our customers and the fall in oil prices are all signs of a recessionary trend that is likely to sharpen in 2009."

Worldwide, BASF is responding to declining demand by adjusting capacity utilization rates and bringing forward maintenance-related shutdowns. In addition to ongoing activities to reduce costs, the company has launched a new efficiency program, "NEXT," in October with the goal of increasing operational excellence and effectiveness.

The NEXT program involves all regions, divisions and functions at BASF and encompasses more than 500 individual projects. These range from the simplification of processes and increased bundling of resources through to the use of new IT technologies.

Together with its ongoing efficiency programs, BASF expects NEXT to contribute more than €1 billion to earnings per year as of 2012. A large proportion of this amount is expected to be achieved as early as 2009 and 2010, the company said.

However, in the months ahead, Hambrecht expects many challenges for BASF’s business: "We have therefore revised our assumptions and are now reckoning with global economic growth in 2008 of below 2.7 percent and chemical production growth of below 2.0 percent. We expect an average oil price (Brent) of $105 per barrel in 2008 and an average euro/dollar exchange rate of $1.45 per euro. In addition to volatile raw material costs, we see risks in a further economic downswing."

In view of these underlying conditions and based on the assumption that there will be no further adverse developments that cannot be foreseen at present, BASF has revised its outlook for the full year: The company expects to increase sales in 2008 and aims to match the previous year’s EBIT before special items.

Sales increase in all segments

In the Chemicals segment, BASF increased sales significantly by 19 percent, above all due to higher prices and slightly higher volumes. Sales increased in all divisions. EBIT before special items declined, primarily as a result of lower margins for cracker products as well as plant shutdowns due to the hurricanes on the U.S. Gulf Coast.

Sales in the Plastics segment increased by 4 percent. Due to the slowdown in the automotive and construction industries, higher raw material costs could not be passed on sufficiently to the market. In addition, earnings were negatively affected by plant shutdowns due to the hurricanes on the U.S. Gulf Coast.

The Performance Products segment posted a 5 percent increase in sales. Prices were raised substantially, in particular in the Care Chemicals division. EBIT before special items rose significantly thanks to the strong performance of Care Chemicals and reduced fixed costs in all divisions.

The Functional Solutions segment increased sales slightly by 1 percent despite the substantially reduced demand from the automotive and construction industries. Earnings declined in the Construction Chemicals and Coatings divisions because higher raw material costs could not be passed on fully to the market. The increase in earnings in the Catalysts division was not sufficient to compensate for this.

BASF achieved sales growth of 11 percent in the Agricultural Solutions segment thanks to higher volumes and prices. Adjusted for currency effects, sales grew by 17 percent. The relatively high price level for agricultural products resulted in strong demand for innovative crop protection agents. Although the third quarter generally tends to be weak due to the seasonal nature of the business, the company increased earnings significantly and reached a record value.

Sales in the Oil & Gas segment increased by 46 percent, in particular due to the higher oil price and a rise in volumes in the Natural Gas Trading business sector. Earnings also rose considerably as a result of the oil price. Earnings in Natural Gas Trading were negative as a result of the time lag in adjusting sales prices to purchase prices.