Trade conflicts, the prospect of a hard Brexit and lower production levels from car makers are all creating angst among Germany's biggest chemicals companies. And then there are fresh rivalries in the Middle East, plus fears about the health of the Chinese economy this year. No wonder executives are worried.
BASF’s boss, Martin Brudermüller, who chairs Europe’s biggest chemicals company, sums up simply: “2019 isn’t going to be easy.” He’s busy trimming down BASF, a maker of petrochemicals, vitamins, glues and other mixes used to make paper, pharma and hygiene products. Brudermüller wants to avoid job cuts – but that depends on whether the company manages to grow this year.
Forecasts are not promising. The German chemicals industry association, VCI, expects production levels to grow by 1.5 percent this year, although that number also includes the healthier pharma sector. Pharma companies are less vulnerable to the ebb and flow of the markets. Chemicals producers should be able to maintain current levels of trade but that's it, is the VCI’s sobering prediction.
That’s bad news because the chemicals industry is considered a bellwether for the whole economy. The trouble is falling demand and as companies rein in production, as they did at the end of 2018, and production facilities slow, price pressure rises. Optimists, such as Hans Van Bylen, who heads the VCI as well as glue and detergent maker Henkel, expects demand will bounce back from carmakers; they are critical industry customers. Still, he says, this resurgence may be short-lived, given the slowing of the global economy and resurgent protectionism.
Germany's BASF and peers such as Evonik, Covestro and Lanxess won’t be immediately affected by the growing trade conflict between China, Europe and the US, as they have local facilities in each region, meaning import duties shouldn’t prove too damaging. Any broader economic contractions would be far more problematic.
Brexit threatens bigger disruption. Many German facilities use primary products made in the United Kingdom so any no-deal exit would mean major problems in their supply chains. Those products would lose the approval of the ECHA, Europe’s chemicals watchdog, in Helsinki, and the whole process would need to be relaunched. That problem would affect numerous other users of these products.
German chemicals makers look to China with even greater concern. Beijing wants to significantly raise its standard of domestic chemicals, moving providers away from mass production into higher-value products. While German companies may profit in the interim from the closure of facilities that make products to European standards, Germans will face tougher competition in the long term.
Specialty chemicals, such as the white pigment used in sun blockers, are an area where Germany has exceled. They’re made in smaller quantities and, as more innovative products, promise higher profits and growth.
For now, Germany is ahead of China in terms of technology and research but producers here view the Chinese industry as a greater threat than other rivals, an industry survey found. Beyond China, Saudi Arabia is also beefing up domestic providers Saudi Aramco and Sabic to deliver specialty chemicals.
Compared to such state-powered business, chemicals makers from Germany and throughout the west are likely to become less relevant, according to Wolfgang Falter, of consultancy Deloitte. They aren’t going down without a fight though: BASF’s restructuring seeks to strengthen its specialty chemicals business. And Lanxess and Evonik each spent billions buying specialist providers in recent years, in order to expand their offerings. That should help them cope with what's shaping up to be a middling year at best for the sector.
Handelsblatt correspondent Bert Fröndhoff covers the chemicals industry. Allison Williams adapted this story into English. To contact the author: [email protected]