INSIGHT: Q1 financial results collapse, demand malaise persists in Q2

BARCELONA (ICIS)–Collapsing first quarter (Q1) year on year financial performance from leading chemical companies BASF, Dow and others reflect a continuing rout in demand for chemicals in markets in all regions.

BASF on Thursday reported substantially lower sales and operating earnings while Dow earlier this week saw falling Q1 sales and operating profits lead to a net loss. Both companies suffered from steeply lower demand across key segments.

According to ICIS market reports, there are few signs of the hoped for upturn in chemical markets as we move towards the middle of the year.

Although BASF managed to achieve a year-on-year improvement in Q1 net income, this is compared to Q1 2022 when the company booked a €1.1bn charge for its 73% shareholding in oil and gas division Wintershall, which had substantial exposure to Russia.

Across the company sales were down €3.1bn, with lower volumes in almost all segments due to weaker demand. Lower pricing also dampened sales performance. Earnings before interest and tax (EBIT) plummeted by €887m to €1.9bn, hit by declines in chemicals and materials.

Lower demand saw chemicals, petrochemicals and intermediates all suffering double-digit declines in both volumes and sales. Margins for producing these building block chemicals also collapsed to less than one third of Q1 2022 levels.

All BASF’s divisions suffered lower sales and earnings, with the exception of small bright spots for automotive coatings and catalysts plus some agricultural products.

To make matters worse, all geographies are being affected by the downturn in demand. Sales fell in Europe, North America, Asia Pacific and South America, Africa and Middle East. Sales volumes fell across the board, and pricing too in most regions.

China stands out as the worst performer, with sales down 28.5% compared with 13.8% in Europe.

For the full year, BASF forecasts a substantial drop in operating earnings and lower or flat sales.  The company concedes that the global economy is still subject to great uncertainty with momentum in global industrial and chemical production still subdued.

BASF CEO Martin Brudermuller said the company was operating in “a stagnating and difficult economic environment.”

DOW COLLAPSE
Earlier this week Dow reported a net loss of $73m for the first quarter (Q1) on a slump in volumes and sales prices in key segments and important geographies.

Net sales for the largest US chemical company were down 22% at $11,851m reflecting declines in all its operating segments driven by lower macroeconomic activity.

There was less demand from industrial customers, building and construction and consumer durables.

CEO Jim Fitterling noted the impact of higher inflation on consumer demand and soft global economic activity in his outlook.

Although Q1 EBIT was slightly up on trough Q4 2022, Dow expects Q2 EBIT to be $75m, or 11% lower than in Q1.

FINANCIAL SUFFERING SPREADS
Also reporting Q1 results on Thursdat 27 April, TotalEnergies saw petrochemicals output fall due to slowing global demand. Q1 stream cracker utilisation fell to 75% from 86% in Q1 2022.

SCG Chemicals on Thursday reported  a 62% year-on-year decline in Q1 profit, weighed down by a soft reopening of China – a major export market for the Thai producer.

Meanwhile Netherlands headquartered coatings and chemicals group AkzoNobel saw Q1 net income collapse amid shrinking sales volumes.

Poor Q1 financial results and full year expectations reflect the fact there is no end in sight to the cost of living crisis which continues to weigh on consumers around the world.

Although energy prices have declined, interest rates keep rising and inflation remains stubbornly high in major economies.

In this environment most consumers are focused purely on meeting day to day needs, avoiding the expense of buying big-ticket items. This affects key chemicals markets such as automotive, construction and electronics.

For example, Oxford Economics forecasts that global light vehicle production for 2023 will be 3.1% up on 2022, but still 4.8% below 2019 pre-pandemic levels.

Initial eurozone and UK manufacturing purchasing manager indices (PMIs) for April are in contraction (below 50), although services are expanding.

Globally, PMIs are flat or negative.

Weakening demand in H2 2022 led to severe inventory destocking across chemical chains, which continued into Q1 2023. This is particularly being felt in housing and construction end markets, as well as markets closer to the consumer such as do it yourself (DIY) architectural coatings, electronics, appliances, kitchen and bakeware, and even personal care.

Challenging economic conditions continue to be in store for the US chemical industry with weakness in the industrial sector in particular, according to ICIS chief economist, Kevin Swift.

Global overcapacity is also putting operating rates and margins under pressure. Latest data from ICIS shows how China dominates excess capacity as it adds 232.5m tonnes/year of new petrochemical and fertilizer capacity in 2023 and 2024.

Capacity additions, led by China, is leading to unprecedented overcapacity in major building block chemicals around the world.

ICIS REPORTS GLOBAL DEMAND IN DOLDRUMS
A survey of all chemical markets articles published by ICIS news since 18 April shows that the overwhelming majority are suffering from poor demand conditions with no sign of a pick up. Where prices are increasing this is usually linked to production outages or cuts which have tightened availability.

Only two out of the 37 articles surveyed reported improving demand – Asia and Middle East polyethylene terephthalate (PET) and China methylene chloride. The only bright spots reported are where supply has been cut.

Analysts at Baader published a note today suggesting global chemical demand is gradually improving. However it is far away from the same time last year and happening more slowly than expected.

“This slow recovery is coming from the end of the destocking and a slight sequential underlying demand improvement,” the analysts said.

Insight by Will Beacham