BASF looks to China for growth; to slash European costs by EUR1 bn

Germany chemical firm BASF says it will slash another EUR1 billion in annual costs at its Ludwigshafen headquarters, citing weak demand and high energy costs in its home market, highlighting the country's economic troubles.

BASF Group reported sales of EUR68.9 billion in the 2023 business year, compared with EUR87.3 billion in the previous year. It attributed this to “lower raw materials prices in particular, which led to lower prices in almost all segments. Sales volumes fell in all segments as a result of weak demand from many customer industries”.

The annual cost savings will be reached by the end of 2026, affecting both production and administrative activities at its largest chemical complex, but it was set to shrink further beyond that, the German chemicals giant said recently.

It also predicted that group earnings before interest, taxes, depreciation and amortisation (EBITDA), adjusted for one-offs, would rebound to between EUR8-8.6 billion in 2024. BASF expects growth in China to lift earnings this year.

The high investment-related cash outflow is mainly due to investments in the new site in China, which will reach their absolute peak in 2024 and then decline in the following years.

BASF is investing in a total investment of up to EUR10 billion by 2030 in Guangdong, China. It is BASF's largest investment to date and started construction in 2019.

CEO Martin Brudermueller, who will quit in April to become non-executive chairman of carmaker Mercedes-Benz, cited high competitiveness of the group outside of Germany under challenging conditions.

"On the other hand, the negative earnings at our Ludwigshafen site show the urgent need for further decisive actions here to enhance our competitiveness," he added.

An economic downturn in its home market is weighing on volumes affecting speciality chemicals and more basic petrochemicals known as its upstream business, BASF said. This would lead to more job cuts that are being discussed with shop stewards.

"It's serious because you can really see Europe lost competitiveness. But within Europe, Germany in particular lost competitiveness," said Brudermueller.

The German government this week cut its 2024 economic growth projection to 0.2%, from 1.3% previously, amid weak global demand, geopolitical uncertainty and persistently high inflation.

Ludwigshafen would remain by far the group's largest production complex, but it would continue to shrink and shift from home-made to more imported basic chemicals coming from low-cost regions, said finance chief Dirk Elvermann, citing natural gas costs four to five times higher than in the US.

A year ago, BASF laid out detailed plans to close sites, slash costs and shed about 2,600 jobs in Europe, affecting mainly Ludwigshafen.

In October, the company stepped up cost cuts further to around EUR1.1 billion annually from the end of 2026, having previously targeted a EUR1 billion reduction.

The standing of BASF's Ludwigshafen site, still the world's largest chemical complex run by a single company, has deteriorated over the years. Swapping cheaper Russian pipeline gas for shipped liquefied gas from the US after Russia's attack on Ukraine has weakened its cost position further.

BASF's German business, which contributed a third of group operating profit before interest and tax in 2015, was a EUR600 million compared to last year's global earnings of EUR3.8 billion.

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