By Geoffrey Smith
Investing.com -- BASF (ETR:BASFN) stock rose on Wednesday after Europe's largest chemicals company maintained its guidance for the full year despite ferocious headwinds from soaring energy prices and the global economic slowdown.
The company said it still expects sales of between 86 billion and 89 billion euros this year, with earnings before interest, taxes and special items of 6.8 billion-7.2 billion euros and a return on capital employed of between 10.5% and 11%. That's down largely to support from the euro's weakness this year, which bolsters the margins of its non-European sales, and due to its success in passing on higher input prices in many of its segments.
However, the German giant also warned that it will have to make "permanent" cuts to its operations in Germany, owing to high costs and a thicket of regulations. It had already warned earlier in the month of a big hit to its profits from the surge in energy prices this year, and announced efficiency measures that it hopes will save it 500 million euros a year in annual costs going forward.
"Uncertainties due to the enormous number of regulations planned by the E.U. are weighing on the chemical industry,” CEO Martin Brudermüller said. "These challenging framework conditions in Europe endanger the international competitiveness of European producers and force us to adapt our cost structures as quickly as possible and also permanently."
By 09:40 ET (13:40 GMT), BASF stock was up 1.2% in Frankfurt, testing the four-month high that it hit earlier in the week.
In the third quarter, EBIT before special items fell by just over a quarter from a year earlier to 1.3 billion euros ($1.3 billion), as improvements in its downstream operations, as well as buoyant operating earnings at its oil-producing subsidiary DEA, cushioned the blow from its chemicals and materials businesses. BASF is Europe's largest industrial consumer of natural gas, and the gas bill at its European sites over the first nine months of the year was up a staggering 2.2 billion euros from a year earlier, a stark illustration of how much the war in Ukraine and its parallel economic dimension has cost European industry.
BASF's stock price had lost nearly half its value in the year through June as the simmering crisis in Ukraine erupted into war, sending European gas and electricity prices through the roof. However, it has recovered in the last three months as gas prices have come off their extreme highs. Front-month gas futures in northwest Europe are now less than one-third of their peak, although longer-dated futures contracts suggest they will rise again next year unless Russian supplies are restored.
Restoring Russian supplies has been made more complicated by the sabotage attacks on the Nord Stream pipelines under the Baltic Sea, where BASF holds a stake through its DEA subsidiary. BASF was forced to write down its stake by 740 million euros in the quarter after the attacks badly damaged the pipeline.
The company's bottom line was also hurt by a 60% drop in income from its Chinese subsidiary.
There was, however, significant relief for the company in the form of higher interest rates, which reduce the net present value of its future pension fund liabilities. Stifel analysts noted that pension provisions, which had already halved in the first six months of the year, fell further to 2.1 billion euros in the third quarter and are likely to fall by as much as a billion in the current quarter.