German chemicals sector suffers from weak Chinese demand

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Germany’s Faustian pact over cheap Russian energy has collapsed. Costs initially soared across the country’s industrial sector last year. Chemical manufacturers are particularly sensitive to the price rises. Economic weakness in China, their biggest source of growth, has further squashed margins as volumes fall. Preliminary results from BASF illustrate the malaise.

Operating earnings at the chemicals conglomerate fell 45 per cent last year to €3.8bn. Not only were figures worse than expected but they deteriorated at the end of the year. BASF has a lengthy cost-cutting plan that spans the next two years.

It has already started selling assets — jettisoning oil and gas business Wintershall Dea in December. With core chemicals markets expected to remain in the doldrums this year, incoming chief executive Markus Kamieth will be under pressure to source more growth when he arrives in April.

There are some positive signs for 2024. European gas prices have stabilised around 2021 levels as imported LNG supplies make up the Russian shortfall.

But Europe’s chemical businesses are hardly humming. Petrochemical plants run at 75 per cent capacity — decade lows, according to Barclays. Weak Chinese volumes mean spreads on commodity chemicals — during the transformation of fossil fuels into petrochemicals such as ethylene — remain near 20-year lows.

If the cycle improves and volumes pick up then more gas demand could push up prices. But without a Chinese recovery, the prospect of this is slim. Cyclical upswings in chemical demand are strongly linked to Chinese credit expansion, notes Jefferies. 

European production is in the balance. BASF is preparing for a smaller domestic industry. A new €10bn Zhanjiang plant in China is expected to start operating in 2025.

Having already scrapped a share buyback programme at the start of last year, BASF’s progressive dividend policy could be called into question. The company said on Friday that it expected 2023 free cash flow of €2.7bn. This would not cover consensus expectations for a dividend payout of €3bn, as compiled by Visible Alpha.

The final figure will be confirmed in February. Even at €2.7bn, BASF would need to dip into debt or cash from divestments to cover the shortfall. This is unlikely to sit well politically amid job losses and plant closures. Tough choices — more asset sales or cost cutting — leave Kamieth little to look forward to when he takes charge.