Petrotahlil -BASF’s comments on Wednesday on visibility and the third quarter show how cautious the German chemicals major is in the face of the uncertain recovery this July and August from coronavirus lockdowns.
The company also believes that there is a significant risk that recovery will be slower over the longer term than it might have expected.
The ‘new normal’ after coronavirus may mean that it has to reassess cash flows from a range of assets, leading to further impairments, possible in the third and even the fourth quarters of the year.
BASF was more forthcoming than usual on current business although the pandemic has affected customers in different ways and it is not prepared to give earnings guidance.
“The gap between average daily orders entries in the April to July period as compared to the prior-year months is slowly narrowing,” said CEO Martin Brudermuller.
"With a seasonally rather weak August ahead of us, it remains to be seen when the gap can be closed.”
Still very cautious, customers are ordering low volumes and seem to be still working largely from hand to mouth.
Brudermuller said that about 50% of orders in hand across the company are booked for the next month and another 30% have a delivery date for the month after.
“This means that 80% of all our orders on hand will be booked within the next two months. We have no clear visibility beyond that.”
In terms of customer industries, BASF has been hit hardest by the shutdowns in automotive given that almost all automobile production sites in Europe and North America were closed at one time earlier this year.
Sales in its Surface Technologies, Materials, and Industrial Solutions segments were down sharply in the second quarter.
Because of scheduled cracker shutdowns in the second quarter of 2019, sales volumes in the Chemicals segment, which includes petrochemicals, were in fact up in Q2 2020.
Sales for Chemicals in the quarter, however, were down 18% on price falls.
Across BASF, second-quarter sales volumes were down 11%.
Visibility remains poor across so much of the chemical industry given the nature of industrial and economic recovery from lockdowns and the uncertainties that persist as the coronavirus continues to spread and pockets of infection occur.
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BASF will only say now that it does not expect a significant improvement in earnings before interest and tax in the third quarter compared with Q2 because of generally lower demand in August and the seasonality of its Agricultural Solutions business.
“There is a significant risk that both the economic recovery and the medium- and long-term macroeconomic development will be slower than before the coronavirus pandemic,” Brudermuller said.
“The impact on our business can hardly be predicted reliably.”
At the macro-level, there is hardly much to go on and, as Brudermuller said, second-quarter national indicators are not published yet and forecasts are constantly changing.
Take autos again. Second-quarter automobile production, excluding China, was down about 60%; BASF expects a decline of 27% over the full year.
Preliminary data are showing that, globally, chemicals production was down 4% in the second quarter.
The resilience of chemicals demand in some important customer industries was one reason why this fall was not much greater, Brudermuller suggested.
Another is China, which has embarked on a ‘V’ shaped recovery after the pandemic.
"What China has done is very, very impressive,” Brudermuller said on a conference call with journalists.
He is relatively confident that China can stimulate demand across its huge population where the opportunities for demand growth clearly exist.
It is question, however, of how sustainable the recovery in China might be. Production has rebounded but retail sales need to follow suit.
“The coming months will show whether consumer demand [in China] will rise with production levels. Going forward, it is crucial that global demand returns to a reliable solid level,” Brudermuller said.
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Source : ICIS