BASF Cuts Profit Target as Chemical Recession Looms

By Sheenagh Matthews

Oct. 30 (Bloomberg) -- BASF SE, the world's biggest chemicals supplier, may report its first decline in earnings for seven years as slowing economies cuts demand for plastics and resins used in electronics.

Earnings before interest, tax and special items declined 8 percent in the third quarter to 1.57 billion euros ($2 billion), missing the 1.74 billion-euro estimate in a Bloomberg survey of seven analysts.

The supplier of materials for Adidas AG sneakers said today it may struggle to match last year's result, dropping a prior forecast for a ``slight improvement'' in earnings before interest and tax and one-time items. Declining demand in main markets, a reduction in customer inventories and falling crude prices all point to an imminent recession, which will intensify next year, Ludwigshafen, Germany-based BASF said.

``For consumer end markets such as auto, building and textiles, it does seem very black,'' said Lutz Grueten, a Frankfurt-based analyst at Kepler Capital Markets, who rates BASF ``buy.'' ``Demand will fall off significantly next year. But they are in good company; all chemical makers will feel it.''

BASF dropped as much as 8.5 percent to 22.52 euros in Frankfurt trading and was down 5.1 percent at 23.36 euros as of 9:41 a.m. local time. The stock has dropped 54 percent this year, cutting the company's market value to 21.8 billion euros. U.S. leader Dow Chemical Co., which reported profit that topped estimates, has declined by 36 percent in the same period.

Sales increased 13 percent to 15.8 billion euros.

Shutdowns

Global chemical makers need buoyant order books to service the high operating cost of running factories and keep debt levels in check after more than $200 billion in acquisition spending over the past two years. That's far from the current reality. The German association representing chemical companies including Bayer and BASF SE in September cut its 2008 industry forecast, citing rising raw-material and energy costs.

BASF said today it's focusing on improving cash flow and reducing its asset base. Factories have been slimmed down and maintenance-related shutdowns brought forward to counter deteriorating markets.

``We will make every effort to match the excellent EBIT before special items recorded the previous year,'' BASF said in a statement. ``This aim poses an even greater challenge than just a few weeks ago, and it will take a particular effort to achieve it.''

Diversification

Chief Executive Officer Juergen Hambrecht has spent more than $8 billion on purchases to broaden its product range and help protect it from economic cycles. Its 2006 purchase of catalytic-converter maker Engelhard increased dependence on the automotive industry at a time when U.S. industrywide auto sales are posting their biggest declines since 1991.

Net income declined to 758 million euros, or 82 cents a share, from 1.21 billion euros, or 1.25 euros a share, a year earlier, when the company booked a one-time tax gain. Analysts in a Bloomberg survey predicted profit of 724 million euros.

Higher prices for pesticides, spurred by spiraling grain prices, boosted earnings at BASF's agricultural division. Syngenta SA, the maker of the Karate pesticide brand, is forecasting 35 percent earnings growth this year as farmers spend more on chemicals and high-yield crops, even as global economies slow. Bayer AG confirmed its sales and earnings forecasts for the year, helped by growth at the farm chemicals division.

Like Syngenta, BASF has entered the market for genetically- modified seeds that resist bugs, in a challenge to St. Louis-based Monsanto Co. Expansion in Europe has faltered because of a lack of approval for its Amflora potato. It has filed a case with the European Court in Luxembourg saying the European Commission failed to act, depriving BASF of as much as 30 million euros a year.

BASF was formed in 1865 by Friedrich Engelhorn as coal-tar dye maker Badische Anilin & Soda-Fabrik. A failure to buy land as planned in Mannheim meant the factory was built on the other side of the river Rhein in Ludwigshafen, which belonged to Bavaria at the time.

To contact the reporter on this story: Sheenagh Matthews in Frankfurt at smatthews6@bloomberg.net.