Chemicals Industry Time Stands Still in Ludwigshafen

Things aren't what they used to be in the chemicals industry. Except at BASF, where little ever changes. Now, the world's biggest chemical group is in danger of being left behind.
Quelle: dpa
BASF's Ludwigshafen works have been the cornerstone of its production for over 150 years.
(Source: dpa)

The geraniums on the acrylic acid plant’s fire escape bloom pink and white. Their hanging basket has been here at the ancestral headquarters of the world’s largest chemical concern in Ludwigshafen in Rhineland-Palatinate for 40 years. BASF workers replant the geraniums every year and water them regularly. They take this tradition very seriously.

For them, Baden Aniline and Soda Factory – BASF – is more than just an employer. It’s a community. The Aniliners, as BASF employees call themselves, like working for the chemical giant with a €70 billion ($74 billion) turnover. They are proud of scientists like Carl Bosch, who invented styrofoam. But above all they are proud of their traditions.

There is a danger that comes with this distinctive spirit. In Ludwigshafen, criticism isn’t always deemed appropriate. Change is viewed with suspicion and risks tend to be glossed over or ignored. At times, the same can be said of the board of executive directors led by group chief executive Kurt Bock.

All this has become a danger for the “Queen of Chemicals,” as some like to call BASF. Competitors in the Middle and Far East seek to challenge BASF for the title of the world’s largest chemical company. The government in Beijing is working on forging a merger of the chemical giants Sinochem and ChemChina. Together, they would not only be larger than BASF, they could also produce more cost-effectively.

Quelle: dpa
Employees praise BASF chief executive Kurt Bock for his prudence but his refusal to embrace change could put the group at risk.
(Source: dpa)

In Saudi Arabia, the royal dynasty is preparing the largest IPO of all time. They plan to float 5 percent of oil producer Saudi Aramco on the stock market. Saudi Aramco is supposed to be transformed into a chemical group with the proceeds. After all, no one else has cheaper or more convenient access to oil, the most important raw material for modern chemistry.

And BASF? Lately, the chemical empire has only shrunk. Chief executive Mr. Bock will be forced to announce the worst year-end result of his tenure in February. Whether the situation will recover this year hinges mainly on the price of oil.

Mr. Bock had very different prospects when he took office five years ago. He boldly announced sales would increase by 40 percent to €100 billion by 2020. The oil price then plummeted to unprecedented depths, which hurt BASF because its subsidiary, Wintershall, was itself an oil producer. At the same time, further growth in China and other emerging markets failed to materialize.

Mr. Bock scrapped his targets. Otherwise, little of note happened. Mr. Bock neither purchased significant companies – the takeover of Chemetall last year for €2.8 billion was minor compared to his competitors’ acquisitions – nor is he prepared to change his strategy in any way. Everything at BASF is supposed to stay the way it is.

The Aniline group is unique in producing virtually every chemical in its value creation chain itself. With Wintershall, BASF even produces its own oil, and processes it into basic chemicals from which plastics, polystyrene and paint are produced. People at BASF call it the “chemistree,” the tree of chemicals.

At the BASF works, every element of production is conntected to the next by an enormous tangle of pipes.

BASF’s competitors concentrate on the trunk, the branches or the leaves. BASF wants the whole tree, from roots to blossom. The principle of the “Verbund,” which for BASF means “the intelligent interlinking of production plants, energy flows, and infrastructure” is firmly anchored in the company DNA and minds of the executive board. It can be traced all the way back to Friedrich Engelhorn, who founded the Badische Aniline and Soda Factory almost 153 years ago.

The cornerstone of the strategy was then, and remains to this day, the works in Ludwigshafen. Each plant here is connected to another, bridged by long, silvery pipelines rising up to a height of three meters (just under 10 feet) throughout the works. All in all, there are more than 2,700 kilometers, or 1,677 miles, of pipes. Taking center stage are the steam crackers, which heat crude and break it down into basic chemical molecules like propylene and ethylene. In this way, the steam crackers supply the whole works – something every new employee learns on their first day.

Though few in Ludwigshafen like to admit it, this Verbund structure has its weaknesses, which became apparent through the company’s worst accident in recent decades. Dark columns of smoke rose up over the plant compound. Construction workers had cut the wrong supply line, causing a fire that ultimately triggered the explosion last October. Four people lost their lives.

Traces of the explosion are still clearly visible today. Cordoned off behind barriers, a thick pipeline was blown apart by the heat of the fire, twisting it grotesquely out of shape. In other companies, such an accident would lead to finger-pointing. “Not in Ludwigshafen,” says a member of the works council. “We’re more close-knit.”

A sad day, says Martin Dahl, in the local Palatinate accent. Mr. Dahl is in charge of the steam crackers at the heart of the Ludwigshafen plant. He had to shut down operations after the accident. A domino effect ensued. Without the chemicals from the steam crackers, 20 further facilities had to be switched off. The steam cracker was back in action within days. But the supply of raw materials is still down more than 10 weeks later.

It’s not just the explosion that reveals the weaknesses of the Verbund. For two years, engineers in Ludwigshafen have been unable to get their most expensive factory up and running. According to sources familiar with the company, BASF has sunk €1 billion into a plant to produce TDI, a compound used to create plastic foam for mattresses and car seats.

First, construction was delayed because of the discovery of a World War Two bomb on the site. Then material defects were noticed in construction components. There were several leaks of poisonous phosgene gas in a safety chamber, halting production. BASF insisted its safety procedure was working. But the facility has again been shut down since the end of November, due to a technical defect. “Damage assessment is in progress,” we are told. “That worries me,” says a member of the works council. "We can do better than that."

Quelle: dpa
The explosion at BASF in October killed four people and disrupted the supply of basic chemicals from it steam crackers.
(Source: dpa)

Meanwhile, competitor Covestro is busy producing foam precursors at its TGI plant in Dormagen, near Cologne. Admittedly, the Covestro engineers only had to build one plant. In Ludwigshafen, they also expanded the factory for the precursors, chlorine and nitric acid, true to the Verbund principle.

“BASF is unwieldy due to the Verbund,” says Thorsten Strauß, analyst at Nord LB bank. Where other firms separate themselves from business units within weeks, BASF can’t cut an element of production out of the Verbund. Integrating new undertakings into the Verbund is equally difficult.

So instead of major changes, the baby-step principle reigns in Ludwigshafen. A little investment here, a cost-cutting program there. BASF has just cut 170 jobs in procurement – that’ll be a smidgen more profit. “Sometimes you wonder at the managers’ lack of ideas,” commented a member of the supervisory board, noting there’s an absence of major stimulation for growth.

But Kurt Bock, known within the company for being stubborn, remains true to his course. “I cannot see the need for radical restructuring,” Mr. Bock, who studied business administration and has a doctorate in economics, recently said in an interview with the Frankfurter Allgemeine Zeitung newspaper. This is striking considering the competition is radically restructuring.

In Saudi Arabia, Saudi Aramco is working on its transformation into a chemical group. U.S. rivals Dow Chemical and DuPont are merging. Bayer ventured the largest acquisition in German business history with its takeover of Monsanto. And Swiss Syngenta, market leader in plant protection, is to join Chinese conglomerate ChemChina. It seems BASF may also have been interested but was outbid by the Chinese.

"BASF doesn’t buy companies because money is cheap,” Mr. Bock said by way of explanation. Wise words, say both analysts and employees. “Prudence is good,” says a member of the works council. But BASF is now the only major player in the agrochemical sector that sells its crop protection products without the seeds to match them.

Mr. Bock hopes the monopoly watchdogs will solve the problem for him. They could force Bayer and Co. to divest of a few business units if their market power becomes too great in individual businesses as a result of the merger. That’s when we want to strike, Mr. Bock assures his investors. So long as that doesn’t mean too much change. “I can’t imagine we will expand our portfolio into areas we are not active in today,” Mr. Bock says.

Instead of the group structure, it’s BASF’s executive board that will be substantially transformed. But that isn’t likely to change anything for the time being. In Ludwigshafen, the same doctrines still rule as 100 or 40 years ago. The boss is an Aniliner, the strategy is the Verbund. And geraniums still bloom at the acrylic acid plant.

 

This article originally appeared in the business magazine WirtschaftsWoche, a sister publication of Handelsblatt. To contact the authors: [email protected]