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BASF Profit Warning Ripples Through Economy

July 9, 2019
The German maker of plastics, pesticides and lubricant additives dropped the most in two months.

BASF SE fired a warning shot signaling a weakening global economy, as the world’s largest chemical company said slowing markets from cars to crops and the impact of the U.S.-China trade war threaten to cut profit by 30% this year.

The German maker of plastics, pesticides and lubricant additives dropped the most in two months, leading chemical-maker peers lower. But with the Ludwigshafen-based company supplying industries ranging from autos to consumer products and computer chips, investors quickly called into question the outlook for other sectors in the upcoming earnings season.

“I doubt in the space of materials and other cyclicals that people will have a lot of confidence in guidance,” Larry Hatheway, chief economist at asset manager GAM Holding of Switzerland, said by phone. “This season is going to be challenging for BASF and others.”

The projected drop in earnings before interest, taxes and special items was “mainly due to the trade conflicts,” BASF said late Monday. Tensions between the U.S. and China haven’t eased as expected, and that has slowed decision-making and investments in key markets including the Asian country. BASF doesn’t see the situation improving in the second half of 2019.

Its shares declined as much as 6.5%, dragging down rivals Lanxess AG and Covestro AG. The Stoxx 600 index of European companies fell 0.7%, with 17 of the 19 sub-sectors falling -- including autos, which was worse-performing even than chemicals.

German Woes

One problem has been the German economy, which still accounts for about 11% of BASF revenue. German factory orders, reported on Friday, slumped in May -- the latest sign that global trade uncertainty is pushing Europe’s slowdown into a more serious downturn.

Two weeks ago, Daimler AG cut its profit outlook for the third time in a year, and analysts at DZ Bank expect a further deterioration for the Mercedes-Benz maker. This week, Deutsche Bank AG said it would cut 18,000 jobs globally amid a huge restructuring.

“We now think it will be tough for the broad German economy to avoid a recession,” Knud Hinkel, an analyst at Pareto Securities AS in Norway, said in a note following the BASF warning. “With autos and chemicals, two German key industries are now in trouble.”

Export-reliant countries such as Germany have suffered the most from the trade-policy uncertainty that’s also been driven by Brexit and rising tension between the U.S. and Iran, said Andreas Scheuerle, economist at Dekabank. The same holds true for companies, within Germany or elsewhere in Europe, he said.

BASF is just the latest company in the chemical sector -- which supplies thousands of manufacturers across the global economy -- to caution about economic weakness. German lubricant maker Fuchs Petrolub SE and U.S. manufacturer H.B. Fuller Co. have previously signaled a deterioration in demand. BASF Chief Executive Officer Martin Brudermueller has sought to fortify the company by simplifying the structure, cutting costs and prioritizing high-margin products.

While a cut to BASF’s growth forecast was “something of a given,” according to an earlier Berenberg report, the extent of the earnings collapse was a surprise. BASF traded 4.3% lower as of 2:44 p.m. in Frankfurt. Rival Covestro slipped 3.2%, while Lanxess was down 1%.

Global auto production declined about 6% in the first half, according to BASF, and twice as much in China, the world’s biggest market. Bad weather hurt North America’s agriculture sector, leading to lower demand for crop protection products. Sales will fall slightly in 2019, down from a prior expectation of growth of 1% to 5%, and BASF still expects to cut 6,000 positions by the end of next year, it said in a statement.

Investors have also been waiting for an improvement in the trade war, said Sonia Meskin, U.S. economist at Standard Chartered Bank. That will have a bigger impact on BASF, with its large international exposure, than with U.S. companies focused on the domestic market, she said in a Bloomberg Radio interview.

“The issues are so intractable that these look like they are set to remain with us for quite some time,” Meskin said. “The parties really have to make a consistent and concerted effort to come to a resolution, and it doesn’t seem like that’s very likely to happen in short order.”

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