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BASF Profitability Alert! – A Dearing Warning Screaming at Distance?

January, 2019

Recently BASF, the Global Chemical Giant and Largest Chemical Producer after scheduled splitting DowDuPont, announced that it is expecting revenue decline in various markets which may impact its bottom line. The information outlined some of the macro level parameters such as the US-China trade war and BREXIT along with some circumstantial parameters such as low water levels in Rhine river as factors contributing in decline. The company announced that relatively weaker performance in chemicals segment is expected to result earnings before interest and taxes to fall to the rage of 15% to 20% year-on-year basis.

While reading the details released by the company along with daily news coming in international market, this seems to be more dangerous than normally anyone would consider. Let me share some ideas which caused more trouble to me than normally it should.

Slowing Dragon Pace - We already have witnessed the pointers indicating that Chinese economic dragon is slowing down and if anyone has put bet on the consistent high growth of economy, they probably are in trouble. Purchasing manufacturing index (PMI) of the country has proved the theory which is in discussion for long. The demand growth for industries such as automotive, and residential, can be key impacting factors in the chemical industry growth. The effect of the slowdown is expected to be widespread considering the connected nature of global economy and current size of Chinese market.

European Troubled Grounds - The growth in European markets has been cause of concern for almost all the economists and analysts. While BREXIT and Greece economy were the dragging issues of the continents, while the budgetary issues of Italy and protests against tax changes in France have added new challenges to the leaders and investors. Leader’s efforts to gain growth momentum are expected to take even more time in coming time considering the existing and emerging challenges

The Seesaw balance of US Economy: The chemical industry association in America has undoubtedly proclaimed growth expectations of the US economy, aiming at higher than ever chemical industry revenues and exports growth. The US fed has also increased the rate on the back of higher job creation, lower unemployment numbers, and strengthening domestic production. However, the yield of country’s 10-year bonds have seen dramatic changes, and has sent warnings of potentially looming recession around the corner. Ever increasing government spending with slowly following revenues has been creating bigger and bigger deficit. Economists are expecting one rate hike in coming 12 months, if any, with significant chances of a recession or growth dip around the corner. While investment and advisory industry leaders are saying 5% yield on the government bonds is plausible in not too distant future, they are also asserting that 5% of the US debt would be higher than annual defense spending for 2019.

Geo-Political Factors - There was a time wherein the markets were opening and leading towards globalization as instrument for collective growth. However, there has been change in the trend with rise of protectionism. The markets around the globe are closing within themselves, saving the domestic industries than exposing them to the global competition. The US-China trade war and BREXIT are stark examples of the phenomenon. On the other hand, the communist countries of Russia and China have seen re-election of their leaders adding their powers. This is expected to add to their concentration of power and wealth. Both Vladimir Putin and Xi Jinping have accumulated power over the period and have established themselves as country leader for foreseeable future. This accumulation of power and wealth can imbalance the relatively fragile global political balance, especially with mercurial leader Trump leading the US.

Only time will tell how the overall market growth would pan-out and whether the global economies can keep recession at bay or not. We as analysts can only read signs and expect our leaders to understand them to ensure the appropriate actions are being taken in the best interest of global economy.

– Ankur Kalra,
Manager – Chemicals & Materials,
Infoholic Research