BASF implements cost reduction measures in Europe

Recently, BASF Group released its 2022 performance report. The report shows that due to multiple factors, BASF's profit will decline compared with 2021. To this end, the company will carry out a series of cost reduction measures in Europe.

Expected profit decline

The financial report released by BASF shows that in 2022, BASF's annual sales will be 87.3 billion euros, a year-on-year increase of 11.1%. Influenced by higher raw material and energy prices, almost all business areas increased product sales prices, resulting in higher sales. Among them, the materials business area and the chemicals business area saw the largest price increases. However, the growth momentum in BASF's sales was hindered by a sharp drop in overall sales volumes, with sales in the Surface Technologies business area and the Chemicals business area declining.

In terms of profitability, BASF's earnings before interest and taxes before special items in 2022 will be 6.9 billion euros, down 11.5% from the previous year, but within the expected range. This was mainly due to the significantly lower profit performance of the Chemicals business area and the Materials business area. In 2022, BASF's operating profit is affected by additional energy costs of 3.2 billion euros worldwide. Europe accounted for about 84% of this cost increase, with the greatest impact on the integrated base in Ludwigshafen. Rising natural gas costs accounted for 69% of the group's overall increase in global energy costs.

BASF expects that the situation in Ukraine, the high cost of raw materials and energy in Europe, rising prices and interest rates, inflation and the high degree of uncertainty caused by the new crown epidemic will continue to exist in 2023. Therefore, BASF expects that the global economy will maintain a steady growth rate of 1.6% in 2023, and the production of chemical products will increase by 2.0%. The firm forecasts an average price of $90 a barrel for Brent crude and an average euro-dollar exchange rate of $1.05. Based on these assumptions, BASF expects Group sales in the range of 84 billion to 87 billion euros in 2023. BASF's EBIT before special items is expected to decline to between 4.8 billion and 5.4 billion euros. It is expected that the first half of 2023 will be relatively weak; in the second half of the year, under the influence of the market recovery effect, the profit environment will improve.

Announcing cost reduction measures

In the face of declining profit expectations, Dr. Brudermüller, Chairman of the Executive Board of BASF, announced specific measures for the cost reduction plan in Europe, as well as structural adjustment measures for the integrated base in Ludwigshafen.

It is reported that in response to the high uncertainty of the European economy, BASF's cost reduction plan will be implemented in 2023 and 2024. After the overall plan is completed, it is expected to reduce the cost of more than 500 million euros per year in non-production areas, namely services, operations, R&D departments and corporate centers, of which more than half will come from the Ludwigshafen integrated base. Specific measures of the plan will include continuous integration of services into shared service centers, simplification of departmental management structures, rational adjustment of business service scope, and improvement of the efficiency of research and development activities. Globally, the measures are expected to have a net impact of around 2,600 jobs. The structural adjustment measures at the integrated site in Ludwigshafen are expected to reduce fixed costs by more than EUR 200 million per year by the end of 2026.

In addition to the cost reduction plan, BASF has also begun to make structural adjustments to the Ludwigshafen integrated base: closing the caprolactam plant, one of the two synthetic ammonia plants and related by-product facilities; reducing adipic acid production capacity, closing cyclohexanol, cyclohexanol, and Hexanone and sodium carbonate units; shut down toluene diisocyanate (TDI) units and precursor units such as dinitrotoluene (DNT) and toluene diamine (TDA). 10% of the asset replacement value of the base and about 700 production-related jobs will be affected by the integrated structural adjustment.

According to BASF, the structural adjustment will significantly reduce the demand for electricity and natural gas at the integrated base in Ludwigshafen. As a result, Ludwigshafen's CO2 emissions will be reduced by approximately 900,000 tons per year, equivalent to a 4% reduction in BASF's global CO2 emissions.